I’m Investing $50,000 In These Dividend-Paying Companies

I’m Investing $50,000 In These Dividend-Paying Companies

Whenever a large amount of capital is received, I try to plan for its use pretty quickly. Capital can flow from a variety of sources. Some months during the year more than double my average monthly inflow of cash due to the high cyclicality of my dividend payouts (Europe being heavily weighted towards months 3, 4, and 5). At times, I may choose to pull a dividend from my company, or some work-related windfall may result in a higher-than-average availability of cash overall.

I try to put cash to work on a continual, weekly basis. At times of such an influx, I try to increase that continual investment rate in accordance with the availability.

Current Investment Appeal

Still, it would be wrong to say that the market as a whole today somehow presents an appealing sort of investment prospect.



With markets trading at a record high in the face of lower expected profits, we’re seeing a general overvaluation quite unlike trends we’ve seen before. This makes the choice of individual investments more crucial than at any time in my investment “career”. The danger of choosing overvalued or the “wrong” investments which could cause that invested capital not to generate any sort of appealing returns is higher than ever.

(Source: Unsplash)

This market situation requires investors, including myself, to adopt new modalities of thinking. We can’t stick to investing in companies that were appealing some months ago – not if we’re looking for a high potential long-term return, rather than a relatively flat one.

We must be willing to put capital to work and take calculated risks. Not foolish ones, but pre-meditated risks that are very likely, based on solid fundamentals and solid history, to result in a positive gain for us as investors.

Failing to choose “good” investments could result in extremely low returns, lower even than average indices. At today’s overvaluation, expected market returns are lower than 3.5% on a 5-year weighted average basis, and choosing overvalued companies could result in returns even lower than that, not even beating the meager expectations of the S&P 500 going forward.

In actuality, it doesn’t matter whether you invest $50, $500, or $50,000 – this thinking should always be part of your approach – but to me, it becomes increasingly important when investing such a larger capital over time.

In my weekly investments, I try to focus on:

1. Choosing a good company, based on fundamentals and historical results and metrics such as yield.

2. Making certain that the company is undervalued, preferably both to historical and future results.

3. Weighing the company against my overall portfolio weighting. Some sectors represent exposure where I’m really not looking for all that much more – if at all.

Each of these three points is important, but they are ordered in the order of importance that I consider them. Portfolio weighting doesn’t matter if the company isn’t even undervalued in the first place, and even an undervalued, low-quality stock will never really be interesting to me, almost regardless of the valuation involved.

Makes some kind of sense, I’m hoping.

My portfolio and goals

Here is the portfolio I’m working with as I’m looking over potential investments with that sum of cash.

(Source: Author’s Data, Google Sheets)

The perhaps largest differences between me and other dividend investors are the following.

1. I don’t own growth stocks in my core portfolio – nor do I plan to. I don’t invest in companies like Netflix (NFLX), Amazon (AMZN), Google/Alphabet (GOOG), or the like.

2. My overall weighting towards IT/Tech/Software, in general, is comparatively small, next to other investors who often hold 15-20% in these sectors.

3. I don’t hold any commodities or currency “hedges”, such as gold, silver or other things. More esoteric things like cryptocurrency is something I don’t even keep track of.

4. I don’t invest in ETFs – except 2 UCITS ETFs tracking treasury bills, and those only because I can’t invest in treasuries directly.

My portfolio, as such, represents my desired exposure to what I view as crucial in our world, the consumer staples seeing to our daily needs, the industrials doing something of the same, and the financial stocks financing these things. The real estate exposure for the housing/real estate we live in or use, and the communications to represent our higher and higher dependence on things like mobile communications. Other segments are smaller, and while I do target a higher IT/Software exposure, and a higher Utility exposure, I’m fairly content aside from this with how my portfolio is structured.

Bear in mind, I’m not saying this weighting of your portfolio is the way it “should” be or anything I recommend. This is what works for me, and it’s what I want in my investments and with regards to my goals. It may not be yours.

My portfolio goal?

Money, Finance, Wealth, Currency, Dollar, Briefcase

(Source: Pixabay)

Money

That’s fairly straightforward.

I target a core portfolio value of around $1,000,000 invested.

Such a portfolio would be based on my current dividend yield, pay out around $45,000-$50,000 worth of dividends each year, and provided the world doesn’t go into chaos, it would continue to increase as a result of dividend growth and pay out in perpetuity.

I will use the cash held therein to continually rebalance and make certain that the holdings are somewhat optimized. This portfolio is also incredibly diversified, with very few holdings more than 2% of the “whole”.

Once this primary goal is reached, I will need to take a step back and look over where I want to go from there. The dividends from such a portfolio would enable me to live the life I envision regardless of what I do, where I do it, or how often I do it. For the time being, I work essentially 60-80 hours a week and focus on delivering more capital into the portfolio. I will still want to work once this goal is reached, though I may start working differently than I do today. Considering secondary and tertiary incomes originating from my work and my side activities (including financial writing/analytics) will, together with my dividends, ensure that there’s always discretionary income to use in the ways I find interesting, even once this goal is reached and I no longer work as I do today.

Secondary financial goals would then perhaps become more interesting to some. As my thinking is now, I will start considering investments in more growth-oriented companies where the potentials for capital appreciation and profits lie not in the double digits, but triple or quadruple digits in a shorter timeframe as the company grows exponentially.

Such investments require an entirely different approach than the approach I have today, and as I forecast things (including dividends, reinvestments, and so on), it will take at least 3 years to reach this from my current level, and forecasting a normalized sort of portfolio growth over the next few years. It may take 2 years, it may also take 10 years – it all depends on where the world goes and how my life goes.

My target, however, is the end of 2023 – let’s see how that goes.

Still, these are my goals, and I hope these give you some insight into how I think regarding my current investments.

I often get the question of why I don’t write about, or invest more money into growth companies – and this is really the answer. It’s not part of the goal of my core portfolio, because these companies lack the qualities I look for in this portfolio. It’s not that I dislike these companies – I love them – but they are something I’d feel more comfortable investing in when my basic safety is “assured”.

Let’s look at investing $50,000.

Investing $50,000

The sum really isn’t all that important – though of course, a larger sum like $50,000 can always sound pretty impressive.

Still, you could use thinking like this with smaller sums as well.

Without further ado, here’s how I currently intend to invest that capital.

(Source: Author’s Calculation, Google Sheets)

Now, a few things.

This is a plan, not how I eventually may end up investing every cent. Companies shift in valuation, and by the time I come around to investing in a month or so, company A or company B may have become overvalued and no longer present an interesting prospect. Also, note that almost 10% of the capital is aimed at IT/software through investments in Intel Corporation (INTC) and Oracle (ORCL). When I invest in tech in my core portfolio, I aim at some of the more conservative choices.

Note also the considerable exposure towards more healthcare/pharma, through CVS Health (CVS), Bristol Myers Squibb (BMY). If we include Walgreens (WBA), Merck (MRK), and Cardinal Health (CAH), the sector is actually by far the largest investment target – over 20% of the total allocated capital. This again is in line with my portfolio weighting ambitions, and the undervaluation I currently see in the space.

There’s still a bit of real estate and finance in the mix – I never want to go long without investing in either, as there usually is undervaluation or appealing fair valuation to be found here. STORE Capital (STOR) is a recent target of mine, and one, as you can see, that I intend to increase my exposure to.

In terms of currency, it’s over 95% USD, which again is in line with my current investment targets, and the overall overvalued state of non-US markets and stocks. The only outlier investment which you usually don’t see in my monthly or article updates is the Exchange Income Corporation (OTCPK:EIFZF). This Canadian gem is a small holding with a comparatively larger risk than the others, but if you’re open to looking at smaller companies with a more specialized aim in return for higher yield, I highly recommend this one. I’ve owned it for years, and even during the Pandemic, it has shone like a beacon.

While a quick mention of each company is nice, it’s better to look at each company individually to clarify the specific potential I see. As there are quite a few, I’ll go through the ones I consider the most relevant – but you can view nearly all of the ones mentioned, if you’re interested, in my monthly update for September, which clarify the thesis at the monthly shift from August/September of 2020.

The Companies

(Source: F.A.S.T Graphs)

We begin with Cardinal Health. There are few companies I like more than those offering a significant, double-digit annual rate of return based on a return to historical discount multiples, as opposed to fair value. We combine this with a high, 3-4% yield, a high dividend safety, investment-grade quality, and a company that services virtually the entire healthcare system in the US, and we have one of my favorite investments with an upside of over 20% annually at current levels. CAH is a class 2 stock with a dividend considered “Safe”, trading at a 3-year forward PEG ratio of just north of 2.0X. There are better discounts in the space, but none as conservative as Cardinal Health. With a 30-year dividend streak, 9% 5-year average DGR, a chowder number of 13 and a narrow moat, you should really consider the company based on its conservative position in the market.

Don’t expect vast, explosive earnings growth, but expect good returns for your capital and a healthy, safe dividend for years and years to come. That’s what my core portfolio is looking for.

Walgreens is in an interesting position as well. Take a look.

(Source: F.A.S.T Graphs)

While a return to a fair value discount on the order of 12-13X is probably a very long way off, the point regarding the company’s undervaluation stands. Even trading entirely flat from today’s valuation, returns exceed 11% annually until 2023 based on these EPS estimates (which are accurate with a 10% margin of error over 85% of the time based on FactSet analyst estimates), and you get a dividend yield of over 5% now. The drop has caused me to carefully reexamine the company, but with regards to its very long-term thesis, I don’t see that anything in the company’s prospects have shifted to the degree which warrants this sort of undervaluation.

WBA remains investment-grade, well-structured with only temporary-seeming headwinds. It has 44 years of dividend history without a cut, an LTM payout ratio of no more than 31%, and a 5-year average growth rate of 7% in terms of its dividend. To mix segments a bit, this reminds me of when General Mills (GIS) was undervalued to similar degrees. Walgreens is a qualitative company that, barring something truly catastrophic, will return to higher multiples once things calm down, and you have the potential to lock in an over 5% yield at current valuation.

The big caveat here, of course, is the recent appointment of the famous Rite Aid (RAD) value destroyer J. Standley as president of US operations. Many readers seem to have confused this with him becoming the CEO of Walgreens – this is not the case and were this the case I might be far more hesitant. While a definite negative, I don’t see this as cause enough to write off Walgreens entirely as a company – and choose to take advantage of what I see as significant undervaluation in the company.

CVS Health is in a position that some might view as better, given the lack of a problematic president.

(Source: F.A.S.T graphs)

CVS is similarly rated, but has better growth prospects and lacks an international component. Some might view this as a positive – I personally like international diversification, but the argument may be valid. Still, CVS also combines the appeal of a return to a discounted valuation at double-digit returns, and even flat trading on part of the company with current forecasts will return in annual rates of 10-15%. The yield is 2% lower than WBA, but the company also offers better current management and more forward earnings visibility. My CVS position is already significant, however, which is the reason why I only slowly increase it, compared to WBA (which is small), where I increase somewhat more.

CVS is a class 2 stock with well-known conservative characteristics and only a 28% LTM payout ratio on a 3.3%, well-covered dividend. It has an appealing 3-year forward average PEG ratio of 1.46X, and these forecasts come with a FactSet accuracy of 100% with a 10% margin of error. I view this as an extremely appealing foundation.

The company’s dividend tradition is only 23 years, with WBA nearly twice as high, but once again, CVS current market position and prospects are inarguably better than WBA’s at this time. Frankly, the numbers speak in favor of CVS over WBA, and my reason for balancing is based on point 3 in my goals – diversification. I do want to keep building my CVS position however, which is why you find it here.

Prudential Financial (PRU) is one of the finance stocks I want to build up further. The reason for this becomes clear when you look at the company’s current valuation.

(Source: F.A.S.T graphs)

Even essentially trading at the same valuation in relation to its historical discount assuming the profit forecasts are somewhat accurate – which based on both FactSet and S&P analyst forecasts, they tend to be, we’re looking at a 20%+ annual potential upside based on essentially no movement upward in relation to its earnings multiple. That, while maintaining a 6.47% yield with a sub-40% payout ratio and a 0.75X 3-year average PEG ratio, with a chowder number of 19. Of course, there’s some risk there, but as much as the chart seems to suggest, considering the companies’ safeties and it being an A-graded company? Not even close, in my view.

Prudential Financial offers a rarely-seen potential upside based on conservative estimates, not even optimistic ones, during a time when companies across the board are trading at premium-level multiples. While I want to be careful extending my finance exposure, this is one company I really don’t mind buying more in. Worst-case-scenario based on earnings forecasts here seems market-beating returns.

I can live with that.

Bristol Myers Squibb is another name you may often see. Given my already-extensive exposure to the company, I’m not looking to buy that much more here. Take a look at current valuation prospects.

(Source: F.A.S.T Graphs)

Expecting the company’s valuation to reach previous-reached levels of premium is too ambitious at this time. Instead, I choose to forecast a fair value P/E of 15 as a 2023E mark, which gives us a prospective annual rate of return exceeding 25%, if these forecasts turn out accurate. Granted, there’s a higher risk to a pharma company than a pure-bred pharmacy stock, but the downside protection with BMY is extremely good, and it’s part of what drew me to the company in the first place.

BMY is a class 2 stock at nearly 48% undervaluation. It’s A+ rated – the best of all the class 2 pharma stocks – and sports a “Safe”, south-of-3% dividend yield with an LTM payout ratio of below 40%. The drawback is its low 5-year average dividend growth, which is almost less than inflation at 3%.

Aside from this, there are very few negatives. It has a wide moat, a below-1X 3-year forward PEG-ratio, and can be considered one of the safer pharma stocks out there. Dividend growth may also change considerably once the Celgene M&A is fully done and debt is paid off. In any case, BMY is a company I want in my future $1M portfolio, and I want at least 1.5% exposure to the company as it stands today.

Conclusively, I buy more.

I want to talk about Pinnacle West Capital Corporation (PNW) as well. This is one of my most recent portfolio additions, but an interesting one. Utility companies are some of my favorites, given their regulated status and usually conservative incomes – and this A-rated gem is a good example of what I look for.

At the time of writing this article, the company offers an almost 4.4% yield based on a just-below 15X earnings multiple – for a conservative utility.

(Source: F.A.S.T Graphs)

Anyone claiming a “massive” upside for a utility company shouldn’t be taken at his/her word. Safe, conservative utilities can at times, such as now, offer impressive upsides in the double digits – like the 14% we see now based on a slight 17X premium 2023 earnings multiple. Such companies should never be expected to trade far above – or far below – their standard valuation ranges however if the company is well-run. This is the case for PNW. The company’s earnings history for the past 15-20 years is an exercise in boredom – the good kind. It moves in an upward trajectory slightly, expecting an annual 3-6% earnings growth, like clockwork.

The company’s forecasts are rarely (if ever) off, and given its operational area in one of the largest growth areas in the US, I believe that I will sit back and enjoy the profits and dividends the company offers investors. It’s safe, conservatively valued, low debt, a “Very Safe” dividend rating, and exemplifies the benefits of owning a utility company.

I’ve quickly built it to 0.3% and target over 1.5% in the end. For more of a deep-dive, I recommend you check out my recent article on the company.

Intel Corporation is another large position I’ve allocated funds to.

(Source: F.A.S.T Graphs)

The reason for this becomes intuitively obvious when you look at forecasts in relation to the current valuation. Even at the company’s current rather muted earnings growth forecasts, Intel is trading well below where it usually trades, resulting in an upside of 16.6% per year until 2022. I hardly need to mention what it is that Intel does, but I do perhaps need to remind some readers of the fact that it’s an A+ rated semi company that’s currently nearly 30% off its usual value. Dividend payout below 30%, a 7% 5-year average DGR, and with a moat as wide as the Atlantic for some of its product groups, practically owning more than 94% of the global server market. Any time this sort of company is on any sort of sale, I think you need to look at your portfolio to see whether you should buy more.

Oh, there’s some long-term systemic risk to the company, in that some of its segments may become dominated by other manufacturers. But Intel knows what it wants, it knows what it targets, and the company’s recent faux-pas will, as I see things, be weighed up by the company’s more-than-excellent fundamentals and positive business areas.

I want a 2% allocation to Intel – and I’m buying more.

We should really look at STORE Capital as well to exemplify both how good REITs have expanded, and how they might do more going forward. The company is a relatively new addition to my portfolio, but one that’s quickly growing and appreciating as it does so. I first bought the company a few months ago, and following my research prior to buying, the company’s conservative qualities, management, and business areas have convinced me to put more capital to work. It’s always a sort of weighing back and forth – I may choose a more conservative business like Essex (ESS) to a higher degree than I’m currently planning, but the company’s potential upside is still decent.

(Source: F.A.S.T Graphs)

Here you see part of the reason why I may choose to invest differently to some degree. While STOR was a 20-25% potential annual upside when I started buying, now the upside is barely 10% per year until 2023, based on current OCF/FFO forecasts to the company’s historical premium. This is already skirting pretty close to the sort of “minimum” upside I’m potentially looking for in my core portfolio.

Still, the company is investment-graded, and as I said, its quality is excellent. It didn’t cut the dividend, it beats most REITs in Pandemic-level collections, and it has a very interesting business/operating model. It’s perhaps the most unorthodox of my REIT choices when compared to giants like AvalonBay (AVB) or Simon Property Group (SPG), but it’s nonetheless a company I view as truly excellent. For a deep dive, I don’t recommend any of my articles, but this – admittedly biased article – by the CEO of STOR. However, because I happen to agree with it, I’m not bothered by referencing it. The simple fact is that management, and the CEO, already has 2 successful businesses behind him, and STOR seems to combine everything he learned from them into this new business. It’s a business I want a part of.

I also want to mention my continuing investments in General Dynamics (GD). The company is one of the few industrials posing an interesting undervaluation at this time.

(Source: F.A.S.T Graphs)

While a significant portion of the upside here is based on the expectation of EPS growth, there are two dimensions to this. First of all, the forecasts have historically been 100% accurate on a 2-year basis with a 10% margin of error, forming an excellent foundation. Secondly, the above-made forecast is based on a historical fair value. GD typically trades at a premium multiple 1-2X above a 15X earnings multiple. Including this in the forecast brings the potential annual upside up to over 19%. Because of that, and despite the recovery we’ve seen since March/April, I view General Dynamics as one of the few, appealing investments in the entire industrial sector – and it’s why the company occupies a prominent position in my investment planning.

Wrapping up

I could go on listing every company in the list mentioned above – but the fact is, some of them I recently made an article on, and the point of this article was to illumine the companies in that list I view as some of the most interesting. When I invest capital for my core portfolio, I’m always looking for the three points mentioned earlier in the article.

1. Choosing a good company, based on fundamentals and historical results and metrics such as yield.

2. Making certain that the company is undervalued, preferably both to historical and future results.

3. Weighing the company against my overall portfolio weighting. Some sectors represent exposure where I’m really not looking for all that much more – if at all.

(Source: Unsplash)

There’s a point to be made as to a part of this – the valuation/undervaluation. When you’re looking at a company to invest in, you typically have 2 components to the company’s undervaluation.

First, you have the potential undervaluation to future growth, wherein the company may trade at or close (or even above) to fair value, but as a result of the coming years increase in profit, the corresponding multiple will expand to encompass the then-relevant profit/EPS.

Secondly, you have the fundamental undervaluation where the company actually trades slightly or well below its typical multiple – in terms of earnings, FFO, AFFO, Book value or the multiple you choose to look at or use. A reversion to the mean here over time also means corresponding, high annual rates of return as these valuations normalize.

Some companies trade with upsides to the former only, fairly valued, and “only” expected to garner returns based on future profits. Some companies trade only on the latter, with profit expectations flat or even negative over the short/medium term, but trade at such an undervaluation that it still might be worth looking at.

When I invest, I always look for both types of upsides. I want companies that trade at an undervaluation seen to their historical average, as well as with expected EPS growth. So while a company like Philip Morris International (PM) previously offered both, the company currently only offers a future growth upside, given that PM is now valued at 15.72X in terms of weighted average earnings. It’s more complex than this of course – the company has a historical premium, where it typically trades at levels of 17-18X to its earnings – but I don’t view this as relevant or something I would bet on given the overall industry headwinds.

What I want to emphasize with this example is that judging a company undervalued is more than just a function of one or even three data points. It’s a comprehensive picture that includes fundamentals, history, and expectations/forecasts. Only then can you truly position yourself in a manner we can even consider slightly “safe”.

Whenever I’m looking at a significant cash portion to invest, I make a comprehensive investment plan such as this one – one that I adjust as necessary over time. I consider things like portfolio weighting, yield, overall risks, and overall company suitability for my portfolio. These are crucial factors. Even if I tell you what I invest in, that doesn’t mean that every one of my choices is suitable for your situation, or for your portfolio.

However – as things stand, these are some of the companies I say currently embody the combination of characteristics such as:

  • Fundamental Safety/Quality
  • Opportunity (as in, current valuation seen to historical valuation)
  • Growth prospects
  • A future appeal, both as a business and in terms of earnings.

Let me know if you feel I’ve missed a qualitative business or company, or one which you view as better than what I currently have.

Thank you for reading.

Disclosure: I am/we are long AVB, BMY, CAH, CVS, EIFZF, ESS, GD, GIS, INTC, MRK, ORCL, PRU, PM, PNW, SPG, STOR, WBA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.

I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.


Originally published on Seeking Alpha

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