As I’ve discussed recently, it’s tough to find value in the market currently and I remain cautious with deploying new capital in the face of ever higher prices for high quality assets. While I’m always more than willing to pay a fair price for shares in a high quality business, I’m not quite as keen to pay more than that. Moreover, I don’t want to sacrifice quality just because the market may be pricing me out of certain equities. I continue to want to own high quality dividend growth stocks at a fair or better price, and although value is tough to find I think there are still some buys out there.
I was recently looking at my portfolio and searching for value amongst my own holdings. I have built my Freedom Fund from scratch, and it contains some of my best ideas. So I figured why not start there? Furthermore, I sorted through some of the holdings that are currently trading for below my own cost basis. If I liked an asset at $X, I most certainly like it at a price less than $X.
The following lists two high quality companies that I believe in, am invested in and are currently trading for prices less than I paid.
I purchased shares in this global bank back in February of this year, for $58.75 per share. The current price is about 3% below that level, so obviously I’m interested in averaging down on this holding. I discussed at length why I like this particular company and those fundamental reasons haven’t changed in the last five months. This is a conservatively managed bank with global exposure. The balance sheet is very strong and the dividend payout ratio is just under 44%, which leaves plenty of room for further dividend raises.
Trading for a P/E of 11 and an entry yield of 4% is very nice. In addition, as I’ve pointed out before BNS didn’t have to cut its dividend during the Great Recession. Not only that, but this company has been paying out dividends since 1833! The time frame since then includes events like The Civil War, WWI, WWII, the Great Depression, The great Recession and many global shifts in politics and economics. That kind stability and history that is hard to find. If you want to be sure that the passive income you’re setting up today is going to be around for the next 50 years or more, you could do worse than holding a high quality bank like BNS in your portfolio.
Digital Realty Trust, Inc. (DLR)
This is another company that I recently initiated a position in, buying shares back in June at $59.34 per share. The market is currently trading shares in this business for almost 4% less than that level. I made my case for this investment just last month, and nothing has really changed since then. This is a great Real Estate Investment Trust that owns data centers and leases them out to high quality tenants with long-term leases in place. Some of their tenants include well-known companies like International Business Machines Corp. (IBM) and PepsiCo, Inc. (PEP).
The compound annual FFO growth since 2004 is 18.7%, and the CAGR of the dividend since 2005 is 15.3%. I doubt this kind of growth can continue indefinitely, but if DLR can even capture a growth rate half of this level I’ll be a happy investor indeed. The current entry yield is 5.45%, which is very attractive in our current low interest rate environment. Trading for a P/FFO under 13 also leaves me quite interested in adding to my burgeoning position. Although rising interest rates could harm REITs due to the leverage that REITs typically employ to finance new purchases, I think DLR is priced at a level that likely mitigates this impact. On top of that, the high yield also provides a hedge against a drop in the share price.
And a few others…
There are a few other stocks that are currently trading for prices either slightly below my cost basis, or just above my cost basis. That list includes high quality companies like Realty Income Corp. (O), General Electric Company (GE) and Toronto-Dominion Bank (TD). All of these companies also have a relatively low weighting in my portfolio, which only adds to the attractiveness of current prices.
Although I’m not particularly enthusiastic about purchasing equities at today’s prices, I feel any of the above stocks make reasonable purchases based on all known current factors.
How about you? What’s on your watch list?
Full Disclosure: Long BNS, DLR, PEP, O, GE, TD
Thanks for reading.
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