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Finding The Next Star Dividend Stock



April 12, 2017 – Comments (1) | RELATED TICKERS: INTC , MSFT , CSCO

Dividend stocks are a great way to invest. They have lower risks, require less attention, and generate passive income. When practiced carefully, dividend stocks can provide solid support to one’s portfolio and create tremendous value, not only for retirees but anyone who have a longer investing horizon.

In this article, I will be comparing some of the most popular dividend stocks side-by-side using various measures, including valuation, profitability, management effectiveness, etc. Data source: Yahoo Finance


Chasing The High Yield Dreams

When it comes to dividend stocks, high yields are the most obvious thing to look at but shouldn’t be the only thing. Some high dividend stocks are simply too good to be true. Let’s look at some high yielding stocks on the market: AT&T, Mattel, Ford, Target, and Kohl’s all have over 4.5% dividend yields. Most of them are fairly priced at the moment. Ford (F) for example, has a single digit trailing and forward P/E. Other common characteristics they share are low profitability and huge debt.  



For each measure, a stock will be rated from “very good” to “very bad” with different colors based on generally accepted standards. For example, a P/E under 20 is generally considered good, and a payout ratio over 70% is generally considered bad. The coloring is to quickly show anomalies.

For earnings beats, each earnings report that beat the estimates gets 1 point, each earnings report that was in line with the estimates gets 0 points, and each miss gets -1 point.

If we look at these brands, they are all going through some business changes. Mattel (MAT) has been losing ground to competition from Hasbro (HAS), which has secured deals with Marvel and Disney for making popular movie character dolls. Mattel’s new leadership is still yet to make meaningful changes, but we will see. Ford (F) is still a big player in the auto market but hasn’t been leading the way in innovation. The company’s efforts on electric vehicles and self-driving cars have presented positive outlook but still seems behind industry leaders like Tesla. Target (TGT) and Kohl’s (KSS) both have been suffering the decline of brick-and-mortar retail sales due to the rise of Amazon, but they reacted in different ways. Target decided to beef up its online presence and advertising to stay relevant, while Kohl’s staying close to large shopping malls to maintain foot traffic and attracting consumers with more quality brands and discounts. Even though they still pay high dividends, these stocks have all dropped in share prices. Mattel and Target have each gone down 23% and 33% in the last 52 weeks. For dividend stocks, a low dividend could be a problem, but losing value in equity will be a huge problem.

If I have to pick one from this list, AT&T (T) might be a good option. The stock is reasonably priced and has a nice 4.8% dividend yield. AT&T has been considered an unitality stock until in recent years. After multiple M&A, including the purchase of DIRECTV and the pending deal with Time Warner, the company is on the track of transforming its business to gain more competitive advantages. The enormous debt and high payout ratio might look scary, but the company has been co-existing with it and increasing dividend annually for over three decades.


Sticking To The Oldie But Goodies

These familiar names need no introduction as they frequently appear in many dividend lovers’ portfolios. Currently, they have been reasonably priced and offer close to 3% dividend.


These are brands with longevity and track record of dividend increases. Surely they face new challenges like increased demand for healthy foods and new tastes, but that won’t stop regular consumers drinking Coke, eating McDonald’s, and shopping at Walmart, at least not in the next decade. Most of these brands also have stellar management teams to best spend investors’ money. Amgen (AMGN), Coca-Cola (KO), McDonald’s (MCD), and General Mills (GIS) all have over 25% return on equity. Their share prices may fluctuate in the short term but often maintain at the same level in the long term.

The reason to choose these stocks over the high yielding stocks above is to achieve considerable return with smaller risks. They compensate lower dividends with higher profitability, more effective management, and more steady share prices. As for which one to choose, I would say it is a matter of personal preference. However, one should always invest in companies they know and trust.


Going For Both Dividend And Growth

Dividend stocks with growth would be even better. Though the “growth” here isn’t the same “growth” in growth stocks, it only means they have some growth potential or they can grow in an expanding economy. Here are a few examples:


Microsoft’s (MSFT) performance in recent years encourages investors to re-evaluate this stock. Its share price has gone up 19.91% in recent 52 weeks, while the S&P 500 only gained 14.33%. The company possesses strong balance sheet, large capital, and effective business strategies from CEO Satya Nadella. One of their future growth prospects is the cloud computing business, which is showing strong growth and gaining market shares. At current price level, the stock still offers a 2.38% dividend.

Intel (INTC) has maintained profitable throughout the years. In the last 52 weeks, the stock has beat all 4 earnings estimates and share price has increased 12.37%. Even with a 3.03% yield, the stock managed to keep the payout ratio low, usually under 50%. Though the company still has dominance in chipmaking, Intel has realized the limited outlook in PC and mobile markets and decided to spend more money on R&D for data center, Internet of things, and autonomous driving. The acquisition of Mobileye shows the management’s determination of seeking future growth.

Cisco (CSCO) would be my personal pick because all its numbers stand out. Low P/E and high operating margin, ample cash and small debt, high yield and low payout ratio, the list goes on. The stock has increased its dividend five years in a row and it currently sits at 3.52%. Cisco has been an Internet infrastructure company and its networking equipment still has large market demand. On the software side, the company has branched out its business into adjacent segments such as information security, cloud computing, and data analytics through a series of acquisitions. 

1 Comments – Post Your Own

#1) On April 20, 2017 at 5:24 PM, afewgoodstocks11 (31.32) wrote:

Are you going to pick some stocks for your profile?


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