I’d have to be crazy to continue investing new capital here, right?
It’s hard to maintain long-term perspective when we’re living in the present. And right now, the S&P 500 index sitting near 2,000 points seems quite high.
But the S&P 500 index seemed expensive when it was over 300 points in 1987; over 500 points in 1995; over 1,000 points in 1998.
The truth is this: Great businesses will continue to grow, and with that growth comes more profit. And more profit means more dividends. More dividends means more income coming my way, which I can reinvest for now (buying more equity in great businesses), but later use to pay for my lifestyle.
That’s really it. It’s no more or less complicated.
Therefore, it doesn’t matter where the stock market is at. Furthermore, I’m not buying the stock market anyway. I’m buying equity in individual businesses which are appropriately priced individually.
As such, I continue to stick to my plan, whereby I invest the savings I generate from living below my means into great businesses that exhibit strong quantitative and qualitative aspects and pay shareholders increasing dividends. And this plan seems to be working pretty well so far, since I’ve gone from $0 to $450 in monthly passive income in a little over four years. I expect to be in even better shape in four more years, but that will require me to ignore the noise and stick to doing what I’m doing.
But the wonderful news is that you can do this too. You can ignore the noise, generate excess capital from savings, and invest that capital month in and month out in great businesses, regardless of what doomsayers might be telling you. After all, if doomsayers had it correct they’d be incredibly wealthy and chilling on a beach somewhere in the Caribbean, not waking up at 5 a.m. to prepare for a morning telecast where they tell you how the stock market is going to crash and the world will end. Optimism is far more powerful and productive than pessimism.
So on that note, I’ve got three stocks on my September watch list. I’m invested in all three of these companies, but they’re all somewhat smaller positions for me. As I near 50 positions, I’ve found myself with renewed interest in rounding out some smaller positions and committing more capital to companies I believe in, yet lack more tangible proof.
General Electric Company (GE)
As I noted in last month’s watch list, this is a stock I continue to keep my eye on.
There’s a lot to like. You have the shift toward more focus on the core industrial businesses, where the future is bright. Management continues to believe in the long-term stories in infrastructure, energy, and transportation. And, frankly, I do as well. They’ve been busy reducing the reliance on the financial side of the company while reallocating some of those resources toward industrial businesses. And they’ve been shedding assets that no longer make sense, like media holdings and potentially the low-margin appliance business. Furthermore, they have a $200+ billion backlog they continue to work through, which should keep GE busy for the foreseeable future.
Obviously, and rightly so, many investors are still feeling the sting of the dividend cut back in 2009. But GE has been making up for lost ground over the last few years, and they’ve been increasing the payout regularly and aggressively. I’m willing to bet we’ll see high single-digit or low double-digit dividend growth for the foreseeable future. The payout ratio, at 60.3%, still allows room for future dividend raises roughly in line with earnings.
Shares appear attractively valued with a P/E ratio of ~18 and a yield of 3.33%. The listing of Synchrony Financial (SYF) (formerly GE Capital’s retail finance division) has already occurred, which paves the way for GE’s unloading of the other 80% of its holdings to shareholders via a tax-free share swap. However, I most likely will just continue to keep my GE shares intact. I think GE is slightly undervalued here, and it remains at the top of my watch list for a September purchase.
Verizon Communications (VZ)
I’m actually invested in VZ via indirect means, as shares came my way after the sale of the 45% of Verizon Wireless that Vodafone Group Plc (VOD) owned, giving up their ownership to VZ in exchange for VZ shares and cash.
I had a fairly sizable VOD position that has since been reduced after the sale of this massive asset, but I now have VZ shares (and cash that was already invested) in its wake. I haven’t yet added to this VZ position, but I am now contemplating it.
Certainly, Warren Buffett’s recent addition to his investment in the company via the massive Berkshire Hathaway Inc. (BRK.B) portfolio has some sway, and I would be remiss if I didn’t admit that has got me thinking a bit. However, I always blaze my own trail and make my own decisions. But there appears to be a lot to like here. VZ is one of the biggest telecommunications companies on the planet, while they also offer media delivery and broadband services.
Profitability and free cash flow have both been improving as of late, and the healthy yield of 4.34% is currently covered quite well by both earnings and cash flow. Plus, a dividend raise is likely on the horizon, as VZ usually boosts the dividend in early September. The stock’s P/E ratio of 10.39 seems attractive, and I think the stock is fairly valued or slightly better here, depending on what kind of growth you think they’ll be able to maintain. My only issue with the stock is the balance sheet, as they had to issue quite a bit of debt to buy the 45% of Verizon Wireless it didn’t own from VOD.
AT&T Inc. (T)
Another smaller position for me and in the telecommunications sector as well. I’m not a huge fan of this sector in general, which is why VZ and T are both smaller investments in my portfolio. And this is because there is little growth to be had in a saturated and competitive marketplace. However, I remain attracted to the sizable and stable dividend payouts that are currently well-covered. Current income goes a long way in that it allows me to reinvest more and more capital, thus rolling my snowball downhill at a more rapid pace.
T is one of those stocks that I find people either love or hate, almost like GE. And that’s because you have contrasting elements. You have a great yield, a fair valuation, and 30 years of dividend growth on one side. But on the other side you have limited prospects for growth, a service that people hate to pay big bucks for, and an extremely competitive marketplace. In addition, you have a number of mobile virtual network operators that have cropped up over the last few years offering service for much less. In addition, competition among the smaller players seems to be heating up, as Sprint Corporation (S) has recently announced some aggressive moves with its pricing strategy.
However, the service that T offers is ubiquitous. People can’t go on without their phones, especially if they’re mobile. And they also offer more than just telecommunications services, as they do have offerings in content delivery and broadband. Furthermore, they are potentially acquiring Directv (DTV) (another Buffett holding), which T feels will give them synergies, cost savings, bundling opportunities, and access to a healthy Latin American market.
I love the 5.31% yield with a 54.1% payout ratio, although the dividend payout against free cash flow is a bit high. But their debt load is manageable, especially compared to peers. In the end, you have a company that has a massive network that collects fees for people and other companies to use it, and the odds are quite strong that people and companies will continue to access it and pay the necessary fees. After all, those shiny new smartphones and tablets don’t just load the internet or make phone calls for free. And as people continue to access more and more data on the go, the fees they pay will grow and become a part of their everyday life. T looks fairly valued or better here, if they can slightly increase their dividend growth rate. The one issue I don’t like here is that low dividend growth rate – just 2.4% over the last five years – so I’m hoping T will give shareholders more than $0.04 annual raises at some point in the near future.
In conclusion, I feel all three of the above stocks offer a decent mix of value, growth, and yield in today’s market. They all have pretty solid prospects, though some look brighter than others. But what one company may lack in growth they offer in current dividend income, and vice versa. I wish I had enough capital to buy all three this coming month, but I highly doubt that will be the case. I also continue to watch Deere & Company (DE), as I continue to believe in the value there. But I might take a break from DE after buying shares in the company over the last two months.
Full Disclosure: Long GE, VZ, VOD, T, and DE.
How about you? Think these are good picks? What’s on your watch list for September?
Thanks for reading.
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