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10 Quality Dividend Stocks Trading Below Their Fair Value

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September 19, 2012 – Comments (0) | RELATED TICKERS: KO , MCD , MSFT

One of the most asked questions I get is, 'When should I start investing?' The implication is that now is not a good time. Either the market is too high after the recent run up, or the market is too scary after the recent declines. There are always reasons for not investing today. What's the secret to picking the right time to start investing?

If you are a trader, peaks and troughs are very important. You want to sell at the peak and buy back into the market at the bottom and wait for the next peak. The problem is peaks and troughs are much easier to identify in hindsight. An alternative to this market timing approach is a long-term buy-and-hold strategy that focus on dividend growth stocks selected using a value oriented approach.

It seems you can always find stocks trading at a discount to their calculated fair value. Bad news about good companies is a bargain hunters best friend. The beauty of an income focused long-term, buy-and-hold strategy is the future declines are not necessarily a bad thing. This allows you to buy more shares at a lower price which in turn will provide you with a higher yield.

This week week, I screened my dividend growth stocks database for companies that are:

- Trading below their calculated fair value
- Yield is greater than 2.5%
- EPS is greater than $0
- Free Cash Flow Payout is between 0 and 70%
- Debt to total capital is less than 50%

Below are the results presented here in ascending rank based on yield:

Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 9 consecutive years.
Fair Value: $38.29 | Yield: 2.7%

The Coca-Cola Company (KO) is the world's largest soft drink company and also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 50 consecutive years.
Fair Value: $40.20 | Yield: 2.7%

Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 37 consecutive years.
Fair Value: $54.96 | Yield: 3.1%

Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 30 consecutive years.
Fair Value: $53.18 | Yield: 2.7%

General Dynamics (GD) is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 21 consecutive years.
Fair Value: $70.71 | Yield: 3.0%

McDonald's Corporation (MCD) is the largest fast-food restaurant company in the world, with about 33,500 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 36 consecutive years.
Fair Value: $110.66 | Yield: 3.1%

Chevron Corporation (CVX) is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals. The company has paid a cash dividend to shareholders every year since 1912 and has increased its dividend payments for 25 consecutive years.
Fair Value: $126.85 | Yield: 3.2%

Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 14 consecutive years.
Fair Value: $29.43 | Yield: 3.1%

Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for 9 consecutive years.
Fair Value: $29.53 | Yield: 3.7%

ConocoPhillips Co. (COP) is one of the largest independent oil and gas exploration and production (E&P) companies in the world, COP spun off its downstream assets in May 2012. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 consecutive years.
Fair Value: $87.19 | Yield: 4.7%

As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.

My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 220+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.

Full Disclosure: Long MSFT, KO, AFL, GD, MCD, CVX, OMI, INTC, COP. See a list of all my dividend growth holdings here.

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