Tuesday, January 4, 2011

4 Dividend Stocks

Here's a recent post on some dividend paying stocks from Dividend Growth Investor.

Each of the 4 stocks have been on my Stocks to Watch list since it was first created.

Johnson & Johnson (JNJ) - Dividend Yield: 3.5%
Procter & Gamble (PG) - Dividend Yield: 3.0%
Philip Morris International (PM) - Dividend Yield: 4.4%
PepsiCo, Inc. (PEP) - Dividend Yield: 2.9%

While JNJ has had many issues with product recalls lately, over the long run each of these businesses are likely to make good long-term core holdings especially when bought at the right price. As I've noted previously, I like the businesses of PG and PM but both now are selling at higher prices than what I'd be willing to pay. The other two are close or currently at prices where I'd consider adding some more shares.*

Great Franchises
What they have in common is a combination of strong brands, global distribution (PM is purely international since the spinoff from Altria), excellent balance sheets, and durable high return on capital. In the long run, it is the durable high return on capital that makes these businesses compounding machines even if the stock prices often don't provide much short term excitement. 

As in all cases, some of the excess returns come down to whether the management allocates capital wisely.

In other words: does not overpay for acquisitions, isn't tempted by growth for growth's sake, and buys back stock only when it is selling below intrinsic value, etc.

By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders. - Warren Buffett in the 1984 Berkshire Hathaway (BRKashareholder letter

Predicting how management is going to behave when it comes to capital allocation is not easy (a long track record is a useful guide though few have one as long as Buffett), but the risk/reward on these seem reasonable. These kinds of businesses are strong enough to overcome some of the more probable dumb moves.

Valuations range from 12.5x 2011 earnings for JNJ to just under 15x earnings for PG.

Adam

* I have long positions in all stocks mentioned. 
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