Seeing dividends hit my brokerage account ranks very highly in terms of life’s pleasures for me. One of the few things I have in common with John D. Rockefeller.
But coming in not far behind receiving a fresh dividend is exchanging cash that does nothing but sit there for equity in a high-quality business that can potentially pay me growing cash flow for the rest of my life.
As such, I quite look forward to the start of a new month. It means capital levels are being replenished, which gives me the ability to reload my BB gun for a fresh hunt.
It appears that I’ll have the cash flow for three separate transactions this month. Perhaps four, if I’m lucky. And what you see below are some of my top ideas right now. This list could obviously change if stock prices radically change over the coming days or weeks, but the stocks listed below are very likely to be among the purchases for August for the Freedom Fund.
Caterpillar Inc. (CAT)
I recently initiated a position in this world-class heavy equipment manufacturer. The stock price fell a bit shortly thereafter, which has once more brought this stock to the top of my list. If I liked the stock at $81, then I obviously like it that much more down here at $77. The reason the stock fell is due to the Q2 earnings report that slightly missed revenue expectations. All in all, I actually thought the results were pretty solid when considering the environment they’re operating in. Meanwhile, FY 2015 guidance remained unchanged – the company expects EPS to land in at $4.70 to $5.00.
It’s a cyclical company, no doubt. But, like I’ve mentioned before, the dividend isn’t cyclical at all. 22 consecutive years of dividend raises, a 10-year dividend growth rate of 12.8%, and a recent dividend increase of 10%. They handle the cycles well when it comes to paying shareholders. And an accelerated buyback of $1.5 billion of stock in Q3 should help buoy results. The P/E ratio of 13.24 remains attractive, even in light of falling earnings. Meanwhile, the yield is a sky-high 3.99% (about 180 basis points higher than the five-year average). In fact, I liked this idea so much that I decided to add to my position just as August got underway. I’ll put together a post on that very soon.
United Technologies Corporation (UTX)
This is a stock that’s long been on my radar, but I kept missing opportunities to pick up shares. Well, it appears another opportunity is upon us. The company recently announced Q2 results that disappointed, including slightly reduced guidance on the year. While reduced guidance halfway through the year isn’t reassuring, the company is still expecting EPS to come in at between $6.45 and $6.60. At under $100/share, you can see where this becomes a compelling name. Meanwhile, the company announced the sale of its Sikorsky business to Lockheed Martin Corporation (LMT) for $9 billion, which seems like an attractive price for UTX, from what I can see.
The stock’s P/E ratio now sits at 14.26 after a drop of over 13% YTD. That compares rather favorably to the five-year average of 16.4. This one is now right in my wheelhouse. Consider UTX has increased its dividend for 22 consecutive years, with a 10-year dividend growth rate of 12.9%. That growth rate is fairly impressive when you combine it with the yield of 2.57%. That yield, by the way, is more than thirty basis points higher than the five-year average. A lot to like here.
Albemarle Corporation (ALB)
Another high-quality value play, ALB’s stock is down more than 11% YTD. Not sure that’s warranted, however. Like many companies, recent results have been challenged. But then you have to ask yourself if the world is never going to change. Is the economy in 2050 going to be the same as it is in 2015? Highly unlikely. More people will be alive buying more products and services that will be priced much higher. And Albemarle sits in a great position with the recent acquisition of Rockwood Holdings, Inc., the world leader in lithium product production. And we all know where lithium demand is going with the increasing proliferation of lithium-ion batteries. In addition, ALB has exposure to renewable energy through the manufacture and marketing of products used in the production of solar cells.
The stock appears expensive with a P/E ratio 23.86. But using adjusted earnings shows that the stock is actually rather cheap. And its current yield of 2.18% is considerably higher than the five-year average of 1.4%. ALB flies under the radar as a dividend growth stock, but it does have some pedigree. It has increased its dividend for the past 21 consecutive years and the last decade has seen the dividend increase at an annual rate of 13.8%. This stock becomes more interesting to me by the day.
Notice a theme yet? Another high-quality company with an incredible track record for rewarding shareholders that’s absolutely beaten up right now. TD is down more than 16% YTD. Can opportunity knock any louder? Although I think the concerns over the housing bubble in Canada are warranted, the regulatory and financial environment up there is significantly different than that of what we know in the US. Thus, I think there’s some insulation. But TD has been in operation since the mid-1800s and I see no reason why the bank is in any immediate trouble. Quite the contrary, recent results have been more or less in line with last year. But the stock (down more than 22% over the last 52 weeks) isn’t. It’s in that disconnect that I think TD remains attractive here.
The stock yields a juicy 4.02% right now, backed by an incredible dividend history that stretches back to 1857. Although the conversion to USD is throwing the dividend growth off (TD declares its dividend in CAD), the bank has increased its dividend regularly since 2011. The stock’s P/E ratio of 12.80 is attractive both in absolute terms and relative terms. I have a smallish position in this bank, and it’s now trading fairly close to my cost basis here. I definitely wouldn’t mind increasing that position here.
Omega Healthcare Investors Inc. (OHI)
One of my favorite real estate investment trusts, I added to my position not that long ago. The stock is up a bit since then, but I think it remains attractively priced right now. The company announced Q2 2015 results yesterday – AFFO of $0.77 was up considerably over the $0.69 the REIT reported for the same quarter last year. They just continue to hum along and I quite like that.
The stock’s yield of 6% immediately grabs attention, but there’s a lot more to the stock than just a high yield. They’ve increased the dividend for the past 13 consecutive years, and typically do so on a quarterly basis. A “pay raise” every three months? On an already-high yield? Sign me up. The ten-year dividend growth rate stands at 10.9%, so you’re getting a very high DGR on a very high yield. That combination tends to result in very strong total returns, which is exactly what OHI has produced over the last decade. I’m highly likely to add another tranche sooner rather than later.
So these stocks are five of my best ideas right now. It’s very unlikely I’ll have enough capital for all five, so at least one will have to wait. But I absolutely wouldn’t mind buying any one of these stocks – or even all five – right now at current prices.
In addition, there are some dark horses. Big Oil continues to drop and I’m starting to become somewhat interested in adding to one of the supermajors. Exxon Mobil Corporation (XOM) is now down more than 15% YTD and is trading a bit below my cost basis. It’s a small position for me and I wouldn’t mind averaging down a bit here. Not extremely interested in that, but if XOM continues to drop, my interest will naturally increase.
Another dark horse is Whole Foods Market, Inc. (WFM). It’s down almost 30% on the year. Although the yield isn’t particularly attractive, the valuation is compelling here. Just about every valuation metric you can look at is currently well below the five-year average, which is somewhat warranted in light of slowing growth. Nonetheless, the company does offer a fairly unique shopping experience. There’s a Whole Foods in downtown Sarasota and it’s literally packed every single time I’m in the area.
I’m very excited to unload my BB gun over the coming weeks. Hopefully, Mr. Market cooperates and kicks up the volatility a notch or two. While the market is sitting near all-time highs, many of the stocks I’ve listed above have strongly corrected over the last seven or eight months. As always, the stock market is a big store with a lot of merchandise available. One just has to walk to the back of the store and take a look at what’s on sale at the clearance rack. I think these stocks represent some of the highest-quality merchandise located at the back of the store.
Full Disclosure: Long CAT, TD, OHI, and XOM.
Anything on your radar right now? Any compelling plays I’m not aware of? What are you buying?
Thanks for reading.
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