If You Can Pick Only One Dividend Stock…
I always get asked what’s the one dividend stock people should buy?
Normally, its people without tons of money to invest, but they want to get started investing in dividend stocks.
And of course, if you can only buy one Dividend stock, what do you buy?
I’m going out on a huge limb here, and I’m going to assume you’re going to buy this stock and hold it forever… that means it needs to be a business that will be around for decades. That way, a savvy investor buying this stock in their twenties will see the long term growth and not worry about the investment.
The company also needs to pay a nice dividend… you see, if you’re in your 60’s and about to retire, you can’t wait decades to see a nice return.
But you need to balance that return with safety…
So much to think about!
I settled on a small group of stocks:
Anheuser-Busch InBev (BUD)
General Electric (GE)
The Home Depot (HD)
Johnson & Johnson (JNJ)
The Kraft Heinz Company (KHC)
Merck & Co. (MRK)
The Procter & Gamble (PG)
Wells Fargo & Company (WFC)
Which one would you pick?
All are huge companies with long track records of doing great business. All are well known in their industry, and all would make a great foundation investment for dividend investors…
But we can only pick one… Where do we go?
We have to start somewhere… so I pulled out my 4 key metrics and started looking at the numbers.
In case you don’t remember, that involves looking at the 4 critical business metrics:
- Payout Ratios
- Growth Rates
Four simple areas that speak volumes about the different Dividend stocks.
The first dividend stock up for review is Colgate-Palmolive (CL).
The company is a fantastic provider of consumer products. I’d bet dollars to donuts you’ve got one or two of their products in your kitchen or bathroom. THey also have a pet nutrition division. SOme of their brands are: Colgate, Palmolive, Speed Stick, Lady Speed Stick, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, elmex, Toms of Maine, Sanex, Ajax, Axion, Fabuloso, Soupline, and Suavitel, as well as Hills Science Diet, Hills Prescription Diet, and Hills Ideal Balance.
According to my data feed, the company has a $64 billion market cap and last year did over $15 billion in sales. Not too shabby!
But let’s dig a bit deeper. The Company posted earnings of $1.51 a share which gives them a Price / Earnings Ratio (P/E) of 47x. That’s a high number which means the stock has been bid up beyond the recent earnings. That said they still paid a nice dividend yield of 2.1%.
With a profit margin of 8.7%, they have a health business… and when you look at the long term 5 year EPS estimates they show a growth rate of 7.3%… not bad.
But today the stock gets kicked to the curb because of the payout ratio. You had to see this coming. For the Last twelve months, the payout ratio was 125%. That means they paid out more in dividends than they made!
What’s scary is this is a Dividend Aristocrat… and that means they’ve increased their dividend payout EVERY YEAR for the last 25 years. It’s not an easy group to get into… but now their inclusion in that elite rank is at risk.
Could it be a short term stumble? Of course… but that’s not good for a core holding.
We have to move on.
The Next Stock up for review is The Kraft Heinz Company (KHC).
I love this company…. They are one of the largest food and beverage companies out there. They have a market cap of 97 billion, and did $18 billion in sales!
Crack the fridge… I’m sure you’ll find some of their brands like: Kraft, Oscar Mayer, Heinz, Planters, Velveeta, Philadelphia, Lunchables, Maxwell House, Capri Sun, Ore-Ida, Kool-Aid, Jell-O, Cracker Barrel, Tassimo, Plasmon, Lea & Perrins, ABC, Master, Quero, Golden Circle, Wattie’s, and Complan.
But this company gets quickly show the door.
You see, they posted an earnings LOSS in the last quarter. So despite a solid 2.8% yield and a projected 5 year growth rate of 17% they are out.
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Merck & Co. (MRK) is next up…
Merck is a company that could save your life someday. The list of products they make for the medical field is staggering. Everything from treatments for cardiovascular disease to pain management and fertility. But it’s not just humans they treat. They also have a large swath of animal products for everything from Cattle to fish!
With a Market Cap of $154 billion and sales of $39 billion Merck is a strong company.
But is it strong enough to be our one and only pick?
Here’s the good things… Earnings of $1.54 a share, profit margins of 11% and nice dividend yield of 3.3%… Plus, a projected EPS growth rate of 4.9% over the next 5 years.
A P/E ratio of 35x… which puts it at the high end of the range (might it be a tad overvalued right now?)… and a payout ratio of 114%.
Once again with a payout ratio at that level, the threat of a dividend cut is increased. I believe it’s a short term issue… but remember we’re looking for the best here.
Say goodby to Merck.
General Electric (GE) Is The Next Company To Get Reviewed…
Who doesn’t love GE? This is a company that bleeds capitalism! Originally founded in 1892, it’s the only company to survive as a founding member of the historic Dow Jones Industrial Average. I own this company in my portfolio…
It’s a huge company… the market cap is $280 billion with annual sales of 118 Billion! It’s got interests everywhere. They are in Power, Oil & Gas, Aviation, Healthcare, Transportation, Appliances, and Lighting… just to name a few!
Once again we have a great company that has been humbled recently… the EPS is a low $0.67 per share and the company carries a P/E ratio of 45x. Way too high. With profits recently negative, the stock just isn’t in the right spot for us to take a look. I love the 12% projected EPS growth for the next 5 years, but it isn’t enough to crown this stock king.
Who’s up next? Another Dividend Aristocrat!
The Procter & Gamble Company (PG) Goes Under The Microscope…
Procter & Gamble is another consumer products company. They have a bunch of different divisions, Beauty, Grooming, Health Care, Fabric Care, and Family Care.
Once again, I guarantee you have some of their branded products somewhere in your house… THeir Brands include Head & Shoulders, Olay, Pantene, SK-II, and Wella, Fusion, Gillette, Mach3, and Prestobarba, Crest, Oral-B, and Vicks, Ariel, Dawn, Downy, Febreze, Gain, and Tide, Always, Bounty, Charmin, and Pampers.
This company is the second oldest on the list being founded in 1837. The market Cap is $219 billion and they reported sales of $66 billion.
As I mentioned, the company is a dividend aristocrat… yep they’ve increased the dividend payout every year for at least the last 25 years! With $2.99 in EPS, and a yield of 3.2% i started getting my hopes up. The Projected growth rate is a robust 6.1% over the next five years…
But the one challenge I couldn’t get over was the payout ratio… 81%. That’s a really high number in my book. Remember we only get one shot here, so why not look for the best.
Sorry, Procter & Gamble it’s time to hit the road.
I need a drink…
Luckily, Anheuser-Busch InBev (BUD) is next on the chopping block… ‘er up for review…
What better than a huge brewing company to turn fat profits and pay nice dividends. Here’s a staggering stat about BUD… they have more than 200 beer brands around the world! See which of these you’ve sampled: Budweiser, Corona, Stella Artois, Becks, Leffe, Hoegaarden, Bud Light, Skol, Brahma, Antarctica, Quilmes, Victoria, Modelo Especial, Michelob Ultra, Harbin, Sedrin, Klinskoye, Sibirskaya Korona, Chernigivske, Cass, and Jupiler.
With 43 billion in sales the company sports a 203 billion market cap.
But here’s something even more staggering… the original company can trace it’s roots back to 1366! Now that’s some age!
The company has strong earnings $4.96 a share and a nice yield of 3.2% the EPS growth is 5.7% over the next five years… but once again a contestant gets taken down by the payout ratio 52%.
Is a payout ratio that high a bad thing… not really… it’s actually quite reasonable… but I think there’s a company in a slightly better situation on the list.
Up Next, Another Dividend Aristocrat bites the dust…
Our Review of Johnson & Johnson (JNJ)
Another Dividend stock… another consumer products company to review…
JNJ was founded in 1885 and operates three different divisions Consumer, Pharmaceutical, and Medical Devices. They make brands like JOHNSONS, LISTERINE, VEENO, CLEAN & CLEAR, DABAO, JOHNSONS Adult, LE PETITE MARSEILLAIS, LUBRIDERM, NEUTROGENA, and RoC just to name a few.
Johnson & Johnson is a dividend Aristocrat.. Having a long track record of increasing dividends.
EPS of $5.49 and a Yield of 2.6% isn’t to bad. A payout ratio of only 40% is solid, and a projected growth rate of 5.7% over the next 5 years isn’t too bad either.
But the company has a P/E ratio of over 20x. Long term, this is near the highest P/E levels it’s traded at. And to me it means it’s been bid up by the markets. I’m looking for a deal, and right now, you pay a premium for JNJ stock.
Watch it in the future… if the P/E dips and all else stays the same, it could be a great dividend stock… but for now… we have to pass.
Up next, one of my favorite stores…
Now We Review The Home Depot (HD)….
Is the Home Depot good enough to be crowned King?
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