A good dividend stock pays and even raises its dividend whether the market goes up or down. As long as you don’t sell the shares, you will always get a positive return (the dividends you receive) no matter how the market behaves. Recently, there has been a lot of volatility in the Energy sector due to oil price plummeting so an investor could value dig there to get a high starting yield and potential return once oil price goes up again…that is if one can stand the volatility and the possibility of more downside in the near-term. That’s why I like buying in small chucks at opportune times when a company on my watchlist is priced at a value. Dollar-cost averaging allows the flexibility of buying more shares at a lower price when the market behaves negatively.
For this month, I looked over my current holdings to see which dividend payers are good values to buy. There are also other good Energy companies to look into, including Exxon Mobil Corporation (NYSE:XOM), Enbridge Inc (TSX:ENB)(NYSE:ENB), TransCanada Corporation (TSX:TRP)(NYSE:TRP), Inter Pipeline Ltd (TSX:IPL), Suncor Energy Inc (TSX:SU)(NYSE:SU), Cenovus Energy Inc (TSX:CVE)(NYSE:CVE), Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ), and Vermilion Energy Inc (TSX:VET)(NYSE:VET).
Classic Dividend Companies
This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.
- Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) – yield: 4.16%
- Chevron Corporation (NYSE:CVX) – yield: 3.96%
- International Business Machines Corp. (NYSE: IBM) – yield: 2.82%
Bank of Nova Scotia
Bank of Nova Scotia is the third largest bank in Canada. This Canadian leading bank provides financial services in over 55 countries. It’s medium-term objectives were met in 2014. The 2015 medium-term objectives is the same as 2014. For example, earnings per share growth is expected to be between 5 and 10%, while return on equity is expected to be between 15 and 18%.
Chevron is a large oil company, which pays an attractive dividend of over 3.9%, 20% higher than its 5-year average of 3.3%. It’s paying out 38% of its earnings for its dividends. Historically, this is at the higher end of its yield range, unless one wants to shoot for above 4.25%, which looks possible.
If history is telling, then, having raised dividends for 27 years in a row, CVX will be increasing its dividend in Q2 of 2015 even amidst low oil prices. Additionally, Morningstar gives it 4-stars, meaning the shares are currently undervalued.
International Business Machines
International Business Machines is a global IT company operating in over 175 countries. It provides solutions which integrate information technology and business processes. Some investors maybe losing faith as IBM dropped the goal of “at least $20 Operating EPS” in 2015 as it previously promised. Still amidst stagnating revenues, IBM continues to return value to shareholders by buying back shares and paying a higher dividend. If you believe IBM is heading in the right direction by investing in Big Data and Cloud Centers around the world, then, it is worth looking into it.
Turnaround Dividend Stocks?
These companies could be viewed as priced cheap, but their technical charts look horrible. Here are a few:
- BP p.l.c. (NYSE:BP) – yield: 6.36%
- BHP Billiton (NYSE: BBL) – yield 5.97%
Previously, I’ve placed BP, an integrated oil and gas company, on the watchlist when it paid a starting yield of 4.5%. Last quarter, its dividend was increased by $0.01, a raise of 1.7% from its last dividend raise, but is a 5.26% raise from a year ago. To me, this shows BP is committed to maintaining and raising the dividend even during harsh times such as the current scenario of low oil prices. Note that however, BP’s payout ratio is 78%, the highest in the last decade. Last month, Morningstar.com lowed BP’s fair value estimate from $56 to $54. With its current price around $35 and $36, there’s about 50% margin of safety.
If you’re a Canadian investor, you won’t get a withholding tax on its dividend by purchasing BP in the Tax Free Savings Account (TFSA), the RRSP, or the non-registered, taxable account.
BHP Billiton is a diversified miner, which supplies a variety of minerals including coal, copper, iron ore, nickel, diamonds, uranium, and silver. Additionally, BHP Billiton also supplies oil. So, BBL is subject to the ups and downs of commodity prices.
If you’re a Canadian investor, you won’t get a withholding tax on its dividend by purchasing BBL in the Tax Free Savings Account (TFSA), the RRSP, or the non-registered, taxable account.
Valuation, Upside, and Technicals
From Morningstar, I brought up some quick numbers. Please note that fair value estimations changes as fundamentals change, so use the percentages as a guide only. The technical comment is my quick opinion after I look at the Finviz charts. In other words, this is a quick and dirty analysis. Remember to perform your own due diligence before investing, and determine whether a stock fits well into your portfolio.
|Ticker||*Price||*Yield||M* stars||M* FV Est.||Margin of Safety||Upside Potential||Technicals|
|TSX:BNS||$63.49||4.16%||3||1$73||13%||15%||In a downtrend|
|CVX||$108.03||3.96%||4||$124||12.9%||14.8%||In a downtrend|
|IBM||$156.07||2.82%||4||$196||20.4%||25.6%||On a free fall|
|BP||$35.83||6.36%||5||$54||33.6%||50.7%||In a downtrend|
|BBL||$40.53||5.97%||5||$70||42.1%||72.7%||In a downtrend|
- * Closing Prices & Yields of January 6, 2015.
- M* = Morningstar
- Margin of Safety = Margin of Safety from Fair Value Estimate (FV Est.)
- Margin of Safety = (FV Est. – Price) / FV Est.
- Upside Potential = Upside Potential to FV Est.
- Technicals from Finviz
- 1Fair Value estimation by end of 2015 in F.A.S.T Graphs
BP and BBL offers the best value from the above list. However, I wouldn’t bet fortunes worth on BP and BBL as they fall more into the turnaround category which could boost a higher return for an overall portfolio. For example, if I bought a full position of $5000 in the Bank of Nova Scotia, a classic dividend payer, I could buy a small position of $1250 in BP or BBL. Reflect on your investing experience, risk tolerance, and your current portfolio allocation and size. Then, set a goal for each of your possible buys. Finally, determine whether a real purchase is warranted.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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