Creating a Great Dividend Portfolio
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A fiscal cliff resolution was passed and dividend tax rates will still be low enough to take advantage of fantastic dividend payers. To celebrate I think you should start building a fantastic dividend portfolio that will hopefully provide you enough income to buy a private island (don't bash me, it's not impossible)!
Dividend Income Investing
Investing in dividend paying companies, especially consistent ones, can provide one with a source of income that could one day exceed their expenses and pay for their living. It is a lofty goal, but with the right amount of research and allocation, I think anyone could have a great portfolio set up by retirement with no need to rely on anyone else for support.
Dividend investing also works exceptionally well for those who like to follow the teachings of Benjamin Graham, or even Warren Buffett. Value investing and dividend investing can go hand in hand, working together to find the best payers at the best value.
What to Look For
You need a strategy for dividend investing, you have to know what you’re looking for and you shouldn't buy unless you can get it on your terms. With this being a dividend portfolio, you will want to look for companies that have a solid record of increasing their dividends year-after-year. You can find this data in a variety of places and a quick search on Google or Bing should help point you in the right direction.
Once you have found stocks that continue to increase their dividends, you’ll want to make sure that it is somewhat fairly priced. A P/E of less than 20 is great for us, if it’s under 15, it’s even better.
So, we have consistent dividend growth, a great looking P/E, what else would we like to see in our dividend paying portfolio? A high dividend, of course! Look for companies paying above 3%, 2.5% if you can get a great deal on it. Make sure that the dividend payout ratio isn’t much over 55%, pushing over the 60% mark is likely the no-go zone unless it is an MLP, REIT or specialized utility company.
If you want your portfolio to succeed you’re going to want to make sure that the companies within it are at a competitive advantage in their field. Warren Buffett typically looks for companies with a “wide moat.” Wide moat companies are those that have a distinct advantage in their field whether it be in technology, consumer products, or medicine, they’re typically the company that everyone goes to when they're looking for a product or service.
Great Dividend Portfolio Companies
The following companies have incremented their annual dividend every year for the last fifty-plus years, you can’t get much better than that when looking to ensure that your dividend is safe.
Procter & Gamble (NYSE: PG) has given their dividend a boost every single year since 1957 with April being the last time they gave it an increase. The dividend yield at Procter & Gamble is a nice 3.3%, more than the 3% that we are looking for.
We have the great, consistent dividend from Procter & Gamble, what about the P/E? Well, that is currently at 21.8. It’s a little higher than we’d like to see, but the 50 years of dividend hikes may be enough to tempt some investors to put this in their portfolio.
The payout ratio at Procter & Gamble is 61% according to Yahoo! Finance, right above the threshold that we’d like to see.
Procter & Gamble may have a high P/E and payout ratio, but it more than makes up for it when it comes to the moat. This company sells so many household brands that I think you’d be hard pressed to not have a Procter & Gamble made item lingering somewhere in your house. Some brands under the Procter & Gamble flag include Duracell, Bounty, Gillette, Pampers, Tide, Iams and Downy. The P&G moat is huge as 25 of their brands each generate more than one billion dollars worldwide and I’m willing to bet that the figure will rise in time.
Emerson Electric (NYSE: EMR) is a leading engineering services and manufacturing firm that serves commercial and consumer markets in over 150 countries. They have been doing so well at their job that they have given out dividend boosts since 1957 with a 10% boost this past April.
The P/E at Emerson is just shy of the 20 that we look for at 19.8, the company's forward P/E is at 13.3. The current Emerson Electric yield is 3.1% which is above the 3% that we’re looking for. The 3.1% yield represents a payout ratio of 60% according to Yahoo! Finance.
So, in Emerson Electric we have the sub 20 P/E, the great yield that we were looking for and a stable payout ratio, but how’s the moat? I’d say that it looks pretty great; Emerson is in a position that would make it hard for smaller competitiors to touch them. The company, as previously mentioned, sells their products in over 150 countries. The products are diverse in nature ranging from surge protection devices to food waste disposal systems for the home. Emerson products are reliable and will be purchased for the foreseeable future.
Both Procter & Gamble and Emerson Electric would make excellent starter positions in any dividend investor's portfolio. Stock up on these stocks and by this time next year you'll be on your own private island*.
*Unlikey, that'll take time. Dreaming is permitted though.
Bonus Island Stock!
Want to scream "WHERE'S MY ISLAND" at the top of your lungs to a CEO? Set your targets on Larry Ellison of Oracle (NASDAQ: ORCL). He owns an island, he can afford to as well. Oracle may also present a great investment for anyone looking to get into the tech sector. The dividend isn't high enough to get into our dividend portfolio, but the returns that CEO Ellison has registered over the long term will help add a smidgen of growth to our outstanding portfolio.
Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle. Motley Fool newsletter services recommend Emerson Electric Co. and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!