Thank God we have maintained a diversified portfolio. Although we feel a bit queasy to see our growth stock holdings fall a lot recently, it’s nothing we’ll lose our sleep over. Besides, my stable dividend stocks have been resilient with some that have appreciated recently! That stability has helped keep us calm despite the growth stock volatility.
Here’s a comparison. Shopify (TSX:SHOP)(NYSE:SHOP) stock has fallen about 20% from its all-time high in about 2.5 months and Converge Technologies (TSX:CTS) has declined about 26% in about 5 weeks.
While the main stock we’ll talk about in this article, Merck (NYSE:MRK), has popped about 15% in roughly 2 weeks. First, we’ll go over why we started a position in the dividend stock. Second, we’ll discuss why it recently popped.
Why we bought the dividend stock
Merck is a general drug manufacturer that has reported fairly stable earnings through economic cycles. Furthermore, it has paid a safe dividend since at least 2001. That is, since then, it has maintained or increased its dividend per share every year. Adding that its payout ratio is safely below 50%, we expect Merck’s dividend to remain safe.
We remind ourselves time and again to buy stocks when they’re undervalued. It’s more difficult to gauge valuation for growth stocks, but it’s much easier to identify a stable dividend stock that’s undervalued.
This year, Merck has been a good buy at or below the mid-$70s range. That would be paying a maximum multiple of about 13.5 this year’s estimated earnings. The stock’s dividend yield was also decent at about 3.5%.
Why Merck popped 15%. Is it still a buy?
Buying a reasonably valued stock combined with good news usually makes an awesome pop. Merck, in particular, rallied recently because of its new COVID-19 pill. This is an abnormally big move for drug manufacturers. This Yahoo Finance video summarized this news. Notably, Pfizer and Roche are also coming out with COVID-19 pills.
Analysts now think Merck stock is only trading at a 10% discount now. So, the estimated 12-month total returns is roughly 14%. The stock should also be hiking its dividend next month.
Is the estimated near-term returns of 14% good enough for you? May each investor decide that for themselves.
Investor’s key takeaways
Our main purpose of buying Merck is for its safe dividend. Its safe dividend is protected by a sustainable payout ratio and stable earnings. We also aimed to buy the dividend stock when it was trading at a good valuation. This helped us get a decent yield and should lead to overall satisfactory long-term returns.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we own shares of Converge, Merck, and Shopify.
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.
Get Exclusive Articles from me on Seeking Alpha
- Access my portfolio of high-quality U.S. and Canadian dividend stocks.
- Real-time updates of when I buy or sell from this portfolio.
- Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.