Evan from here at My Journey to Millions has given me, Dividend Monk, the opportunity to add my two cents regarding his dividend portfolio. In doing this, I first posted my thoughts regarding his selection criteria for picking Dividend Stocks, and now I will provide my thoughts regarding his individual dividend selections.
My Current Dividend Producing Portfolio
-SDY (the ETF)
CenturyLink really helps boost the yield of his portfolio with a high 7.5% dividend yield. The dividend growth of this company into the future looks like it will have to be very small, but with a high yield, that’s not a problem. The payout ratio is nearly 90%, which is a bit high for my taste,
but not completely unusual for a telecom company. The company recently acquired Embark, and now is planning to merge with Qwest, so attempting to predict the long-term potential of this stock is quite complex at the moment. If it can sustain its current dividend well into the future,
hindsight should show this to have been a good investment.
Chubb is my favorite on this list. It’s on my stock watch list for possible purchase in my own portfolio. It’s got a really low valuation and yet is a high quality company. A thing I really love about many of these insurance companies is the way they provide growing dividends by purchasing their own shares at low valuations. Chubb pays out a regular dividend, but behind the scenes they also continually repurchase their own shares year after year, and therefore keep reducing the total number of Chubb shares on the market.
With fewer shares in existence, the earnings and dividends are divided up among an increasingly fewer number of shares, and so dividends-per-share keep increasing. A lot of companies repurchase their own shares and this is not always a good thing, but with Chubb’s low P/E it provides excellent value to shareholders. In 2006, the total number of Chubb common shares
outstanding was 411 million, while the number is down to 314 million now.
The company offers a modest yield of about 2.5% but their five-year average dividend growth is approximately 12%, which is quite substantial.
Leggett and Platt is an interesting pick. The dividend yield of 5% is fairly high, and the dividend growth rate is fairly large as well, but is slowing dramatically during this recession. Their debt levels are modest, and their cash flow is subtantial. The P/E is quite high, but this is normal for a cyclical company like this in a recession. A problem is that revenue has been decreasing each year. This is a diverse manufacturer, and so I’d wager that if the economy improves, this company will do quite decently, but if the recession lingers, this company’s results might be
unimpressive. The company’s moderately strong balance sheet gives it a bit of comfort room to handle challenges.
Eli Lilly is a tough one. On one hand, this company has had a horrible series of investigations, controversy, and problems in the last several years, and their drug pipeline is not as strong as many of their competitors. They recently announced that they are halting development on
Alzheimer’s drug Semagacestat after it was found to worsen symptoms. On the other hand, a lot of this information is accounted for in the very low stock price. The company has a high dividend yield of 5.5% even though it has a moderate payout ratio, meaning that the dividend is both large and sustainable as far as the current numbers are concerned. The company skipped its usual dividend increase for 2010, and so the first three quarters of dividends are equal to the dividends of 2009. If it wants to remain a dividend aristocrat, it will have to raise its dividend in the
final quarter of 2010. Revenue has grown every year between the period of 2006 and 2009, and the company is on track to do it again in 2010.
Pitney Bowes does not fit his investment criteria, so I am not sure why it was selected. The criteria lists a low price to book ratio as a key metric, but PBI has a price to book ratio that is off the charts. In his earlier screening in February, the company was shown to have a price to book ratio of 400, and now it is listed as N/A. This is because the company has so much debt. Their total liabilities approximately equal, or even exceed, total assets. Thus, when one subtracts liabilities from assets, one is left with an approximately zero or negative number, and when one divides by this number to calculate price to book, one finds that the result is astoundingly
high (in the case of dividing by zero or near-zero), or negative (in the case of dividing by a negative). This result could come up as “0” or “N/A” on various stock screens because the ratio is so high that it is no longer calculable as a finite positive number. The company is, however, offering a very high 7% dividend yield, which, if sustained, may result in this being a
The debt might eventually be a problem, but at the moment it’s under control (as shown by their decent interest coverage ratio). The dividend payout ratio is quite high. So far in 2010, the
company paid out dividends that exceeded earnings. A good note, however, is that their cash flow vastly exceeds their earnings, so hopefully they can continue to support the high dividend.
This dividend ETF was a great choice in my opinion. With a small portfolio, or any portfolio really, it can be a good idea to diversify by investing in an index. Since dividend-paying-companies tend to perform quite well as a group over the long-run, this is an attractive collection of companies to invest in.
Overall Review of Evan’s Dividend Portfolio
Overall, I think Evan’s portfolio is reasonable, with some selections I think are attractive while others I don’t quite see the appeal in. Some of these companies are somewhat complex with a fair amount of risk (debt, uncertainty, high payout ratios), so while the portfolio might end up being
effective, it may not be the most optimal list for a newer investor. But on the other hand, they are all established, cash-generating businesses that are diversified enough to withstand an economic recession and changes will not happen very quickly in these types of businesses, so there’s not much to worry about in the short term. And in the meantime, his portfolio boasts a high yield even among typical dividend portfolios, so he’ll get the benefit of a larger income stream.
A common theme in his portfolio is that the dividend yield is quite high, and risk is a bit high as well, so the key factor in the viability of this portfolio will be whether these companies can maintain and increase their dividends. If they can, it’s almost inevitable that this portfolio will
perform decently. But if there are dividend cuts, under-performance may be likely. Since they are all dividend aristocrats, history is on his side.
Full Disclaimer: I do not have any positions in any of the companies mentioned in this article at the time of writing. You can see the full list of my individual holdings in my portfolio.