Dividend Picks From Value Focused Dodge & Cox

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dodge & Cox is a value shop. They simply don't do anything else. And, historically speaking, they've had good success sticking to their value focus. There have been time periods where the fund family's approach has been out of favor, but they never waver from it. While their funds lag during the periods when value is out of favor, such periods generally set the funds up to outperform again when the market's focus turns.

As an investor looking to buy individual stocks, you can learn a lot from simply examining Dodge & Cox's portfolio holdings. I was recently doing just that with Dodge & Cox Stock Fund's (DODGX) September holdings and found three stocks that I thought were interesting: Hewlett-Packard (NYSE: HPQ), Dow Chemical (NYSE: DOW), and Pitney Bowes (PBI).

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PBI data by YCharts

A Down and Out Tech Heavyweight

Dow-30 component Hewlett-Packard is one of the world's largest technology companies. Tracing its roots back to a partnership between founders and technology legends William Hewlett and David Packard, the company has gone through many changes in its life. Most consider HP a personal computer and printer company. While it does make both items, it has in recent years been trying to follow fellow Dow component IBM's (NYSE: IBM) lead and shift toward a services model via acquisition and internal growth. Indeed, IBM moved aggressively toward a service model and away from commodity personal computers a few years ago when it sold its laptop business. While it still builds computer hardware, services have been the growth focus. This is appealing because services generally create annuity like revenue streams based on the contractual nature of the business.

The move makes sense, overall, but HP isn't IBM. Indeed, where IBM executed exceptionally well, HP has struggled mightily. The addition of Meg Whitman, who achieved success leading eBay, as CEO is a plus and is likely to lend stability to a position that has in recent years been a major distraction. However, it's important to remember that HP is a financially strong company that has the ability to see this change through to completion, even if it takes longer, and is a bit messier, than hoped. With a near 4% yield, this value priced tech giant is worth a closer look.

A Cyclical Powerhouse

Dow Chemical manufactures and sells chemicals that are used as raw materials by its customers in the creation of their products and services. Dating back to 1897, the company has a worldwide presence and serves a diversified set of industries, including the appliance, auto, paint, oil and gas, and electronics industries, among many others. The chemicals industry is cyclical and economic downturns can materially impact the top and bottom lines. Clearly the difficulties in Europe and the slow recovery in the United States have been problematic. So, too, has been a recent merger with Rohm & Haas, which didn't go as smoothly as hoped.

The Rohm & Hess integration process appears to be going more smoothly lately, however, so that negative may be past. There is little Dow Chemical can do about the economy, but with more than 100 years of history behind it, it has lived through tough times before. That includes periods with over capacity, which recent capacity additions in countries like China suggest may be imminent. Still, with a yield above 4% and a strong position in the chemicals industry, Dow Chemical is definitely worth considering as an investment option. This is doubly true if you think the economy is going to pick up steam.

High Risk/High Reward

Pitney Bowes is probably the riskiest of the trio. The company is best known for its postage meters and mail automation machinery. The shift toward digital documents and delivery have taken a toll on the company's business and image, though not nearly as bad a toll on its financial performance. Helping to soften the blow has been Pitney Bowes' shifting business model, which has incorporated digital communications and services.

The company is betting that its huge presence in the physical mail space, and its many customer relationships, will allow it to gain a foothold in the transition of its customers to digital. What is particularly interesting about this shift is that physical communications are diminishing, but aren't likely to go away in the near term. Thus, being able to provide customers a complete package spanning both could be a huge selling point. Further, the physical side of the business should act as a cash cow to support the newer, digital side.

Pitney Bowes has a lot of debt and its historical business is clearly in decline. If you believe management is capable of bridging the gap to digital, a 10% yield and a long history of dividend increases, though small recently, could make now a great time to get on board.

Value investing isn't for the weak of heart because it often requires buying stocks that everyone else seems to hate. Going against the grain like that is hard, at best. However, peering inside the holdings of a famed value shop like Dodge & Cox can not only provide good ideas, but conviction in knowing that you aren't alone in your beliefs. Right now, HP, Dow Chemical, and Pitney Bowes are all worth a deeper look, if for no other reason than Dodge & Cox is holding them.

Yours,

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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend International Business Machines. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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