Feb 2016 dividend stock considerations


We've had a pretty busy January when it comes to purchasing dividend stocks. In January we added ~$17,000 and purchased shares of Bank of Nova Scotia, Royal Bank, National Bank, Inter Pipeline, Magna International, RioCan REIT, Vanguard Canada All Cap Index ETF, Telus, CIBC, and Saputo. Phew, that's a long list, let me catch my breath! Most of these stocks we already own except for Magna International and Vanguard Canada All Cap Index ETF. The rationale behind purchasing more shares of what we already own is to be able to eventually enroll in dividend reinvestment plan (DRIP) or allow DRIP to purchase additional shares. I like to keep things simple. Once we are enrolled in DRIP, the dividends received are used to purchase more shares, allowing us to cost average through time. These stocks would essentially be on auto-pilot for us, making it easier when it comes to portfolio management.

With the combination of RRSP contribution and dividend received in US dollar, we have some US cash available to add US dividend stocks to our dividend portfolio. I like to add US dividend stocks in our RRSP to avoid paying the 15% withholding tax. I also tend to like US dividend stocks more than the Canadian counterparts because US dividend stocks generally have more international exposure.

With that in mind, here are some US dividend stocks that we're considering for February 2016.

Archer-Daniels-Midland Company (ADM)
Archer-Daniels-Midland Company may not be a well-known company but the company produces some essential products that are used every day by consumers and other businesses. Archer-Daniels-Midland Company is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and manufactures protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. The Company’s segments include Oilseeds Processing, Corn Processing, Agricultural Services and Wild Flavors and Specialty Ingredients. The Corn Processing segment is engaged in corn wet milling and dry milling activities. The Agricultural Services segment utilizes its United States grain elevator , global transportation network and port operations to buy, store, clean and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. Wild Flavors' products include flavors, colors, sweeteners and health ingredients, as well as ready-to-market concepts and complete solutions. (From Google Finance)

ADM currently has a dividend yield of 3.62%, a PE ratio of 11.2, a payout ratio of around 40%, and a 4 star Morningstar rating. The company has faced some headwinds in recent months due to the low grain price and the strong US dollar. This is why the stock is trading close to its 52 week low. ADM has a 40 year dividend increase streak and has a 5 year dividend growth rate of 13.3%. Given the low payout ratio, dividends should continue to grow. When I looked at ADM's key statics, a couple of metrics that jumped out to me are the high PEG ratio of 5.93 and the low return on equity (ROE) rate of 9.8%. Can ADM continue to grow its revenues given the headwinds they are facing? Its recent earning histories have been below analysts' estimates, which raises some additional concerns. However given that ADM produces some essential products that other businesses need to use and that the world population is growing rapidly, the overall business should remain stable. For long term investors like us, it may make sense to pull the buy trigger when the company's long term revenue potentials remains strong and the stock is selling at a discount.

Target Corporation (TGT)
Target Corporation is engaged in providing everyday essentials and fashionable, and differentiated merchandise at discounted prices. The Company offers its products through stores, online or through mobile devices. The Company sells an assortment of general merchandise and food through its store and digital channels. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items. Its urban format stores, CityTarget and TargetExpress, offer edited general merchandise and food assortments. Its digital channels include an assortment of general merchandise, including various items found in its stores, along with a complementary assortment, such as additional sizes and colors sold online. The Company’s brands include Archer Farms, Simply Balanced, Boots & Barkley, Circo, Embark, Gilligan & O’Malley, Market Pantry, Merona, Room Essentials, Smith & Hawken, Spritz and Sutton & Dodge. (From Google Finance)

Target current has a dividend yield of 3.26%, a PE ratio of 15.37, and a payout ratio of around 50%. It currently has a 3 star Morningstar rating. Target has a 48 year dividend increase streak and a 5 year dividend growth rate of 20.8%. Given that we wanted to add more stocks in the consumer staples sector, Target may be a good pick. Owning both Target and Wal-Mart seems like a no-brainer. We missed the chance to buy Target during the credit card hack fiasco because we didn't have enough US cash. Considering Target is close to its 52 week low, it would be nice to take advantage of this opportunity,

Unlike ADM, TGT has a more attractive PEG ratio of 1.42 and a ROE rate of 19.3%. Target's Canadian expansion was a huge failure and the company now has long-term plans to expand into urban population segment and Hispanics/Latinos segment. Whatever they do, let's hope Target doesn't repeat the same mistakes that were outlined in this excellent article.

Diageo plc (DEO)
People drink alcohol in good times and bad times. This is why Diageo may be an attractive stock to hold for the long term. Diageo plc (Diageo) is a drinks business company. The Company is a provider of beverage alcohol of various brands in spirits, beer and wine. The Company produces its brands from more than 200 sites in over 30 countries. Diageo owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages, vineyards, wineries and distribution warehouses. Diageo's brands are also produced at plants owned and operated by third parties and joint ventures at a number of locations around the world. Its geographical segments are North America, Europe, Africa, Latin America and Caribbean, Asia Pacific and Corporate. It offers products under various brands, including Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, Guinness, Crown Royal, Yeni Raki, JeB, Buchanan's, Bundaberg, Ypioca, Cacique, Windsor, Bell's, JeB, Grand Old Parr, Shui Jing Fang, Ciroc and Bulleit Bourbon, among others. (From Google Finance)

DEO currently has a dividend yield of 3.34%, a PE ratio of 18.11, a payout ratio of around 64.4% and a 4 star Morningstar rating. The US Dividend Champions Spreadsheet maintained by Dave Fish states that DEO has a 6 year dividend increase streak and a 5 year dividend growth rate of 8%. However, since DEO is an ADR, its dividend payment amount can fluctuate due to exchange rate. In reality, the company has managed to increase dividend every single year since 1998 in British Pounds (that's 18 years of dividend increase). Like many ADR stocks, DEO pays dividends semi-annually. The semi-annually dividend payout can be a good thing and a bad thing for dividend - it means that two of our monthly dividend incomes will be much higher but at the same time, we don't get predictable quarterly dividends. I really like DEO's business because alcohol is something people will purchase regardless of the economy. It's also a bonus that DEO owns so many well-known brands. Like AMD, the main concern with DEO is its future growth potential, given DEO has a PEG ratio of 4.13.

So there you have it: ADM, TGT, and DEO. A very short list of stocks I'm keeping a close eye on. When it comes comparing all three of these stocks, ADM looks great from a PE ratio point of view. TGT and ADM look great from a dividend growth point of view. DEO looks intriguing and very attractive from a business point of view. I would love to own all three but given the limited US fund we can only pick one. Stay tuned to see which one we end up purchasing.

Dear readers, are any of the above names on your monthly watch list?

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  • Reply
    February 11, 2016 at 10:31 am

    At the basis, I am an index investor. So, no dividend stocks on my radar.
    That being said, with the current market drop, I start to consider some Belgian dividend stock.

    For the long term, in order to be Financially independent, that is what I want: a decent set of dividend paying stocks. I am just doubtful on when to start this. Any thoughts? I know you mix also stock and trackers...

    • Reply
      February 11, 2016 at 11:12 am

      Hi ambertreeleaves,

      Index stocks also pay dividends too, so it might be a good idea to track what these index funds pay out. I don't know much about Belgian dividend stocks but you might want to check out No More Waffles as he's also in Belgium.

  • Reply
    Norm @ Ridinkulous
    February 11, 2016 at 4:31 pm

    You named another one we own in our tiny stock portfolio, Target. And I think I did pick it up during the credit card fiasco because, like you say, I was looking for a consumer sector company. Plus I like Target.

    • Reply
      February 12, 2016 at 11:41 am

      Target is a great long term hold I think. 🙂

  • Reply
    Mark Seed (@myownadvisor)
    February 11, 2016 at 4:38 pm

    Geez, that's some MAJOR buying. Must be great to have the cash flow for that. Well done.


    • Reply
      February 12, 2016 at 11:41 am

      Thanks Mark.

  • Reply
    Income Surfer
    February 11, 2016 at 4:51 pm

    Great work investing new capital in January Tawcan. ADM is getting close to where I'll start buying as a trade. I don't know that I trust management enough to make it a long term holding, but we've traded in and out of it from 2008 through 2013....with outstanding results. I'm looking to start averaging in, below $30.

    I like Diageo, but it seems expensive. If the debt load isn't too high, I could be a buyer before long. I love the brands and pricing power. I haven't looked into this one in about a year.

    • Reply
      February 12, 2016 at 11:42 am

      Hi Bryan,

      The future outlook for ADM is uncertain. Interesting note about trusting their management, I need to read more financial reports to decide myself.

  • Reply
    Team CF
    February 12, 2016 at 4:46 am

    We ended up buying some similar stock as you over the last week! Great selection of companies, we completely understand your desire for more US exposure, the mentioned stocks are a logical step to increase that exposure.

    Happy Hunting!

    • Reply
      February 12, 2016 at 11:43 am

      Hi Team CF,

      Happy hunting indeed. Wish we have lots of cash available to buy more.

  • Reply
    February 12, 2016 at 11:12 am

    We bought NA and FTS recently, and am actually looking at H as well for a potential buy, though there is little to go on at this point.

    • Reply
      February 12, 2016 at 11:45 am

      Would love to buy more FTS, especially considering the recent drop.

  • Reply
    February 12, 2016 at 12:34 pm

    I'm still liking ADM at these levels and though I made my Feb. buy already there may be room to add more before the month is up. I will say that I have been looking at the consumer staples a bit more as of late for their stability. Seems like KO, PEP, PG, CL, CLX, UL and many others have been rock steady during the last two months when many other sectors have collapsed. Thanks for sharing your considerations. It's always interesting to read what others are thinking in this market.

    • Reply
      February 15, 2016 at 11:39 am

      Hi DivHut,

      ADM looks interesting for sure. All the consumer staple stocks definitely have held up during the last few months, would love to add more of them to our portfolio.

  • Reply
    February 13, 2016 at 4:53 am

    I have been considering to buy some of Target Corporation. I think I may have to because of your review, Taw.

    • Reply
      February 15, 2016 at 11:40 am

      Good to hear that my analysis convinced you to buy some Target shares.

  • Reply
    JC @ Passive-Income-Pursuit
    February 13, 2016 at 7:08 am

    ADM and DEO look like pretty good values. DEO has some great brands and I think they can get growth back on track. Given their scale/size/brands they really only need to deliver something like 3-4% rev growth per year to generate 7% EPS growth assuming they have a fairly conservative balance sheet. I haven't looked into them in a while. Thanks for the ideas.

    • Reply
      February 15, 2016 at 11:41 am

      Hi JC,

      I would love to add DEO, I absolutely love the alcohol sector.

  • Reply
    February 15, 2016 at 10:44 am

    Congrats on all the buying!

    Turbulent times like these sure produce great opportunities.
    We also like to use our RRSP to buy US stocks.

    Apart from our Canadian buys, we recently acquired American Express (AXP).

    • Reply
      February 15, 2016 at 11:42 am

      American Express is an interesting company. Personally I like MasterCard and Visa over American Express. AXP does have a higher yield though.

  • Reply
    February 15, 2016 at 2:37 pm

    Myself bought 100 shares of ADM last friday. I think its a good share for the long run. I will sell short calls on the share. And wenn it is getting lower, i will buy a few more shares i think. DEO is also on my watchlist. Best regards

    • Reply
      February 17, 2016 at 12:20 pm

      Like I said in the post, would love to own all three of ADM, DEO, and TGT one day. Great purchase.

  • Reply
    Our Big Fat Wallet
    February 16, 2016 at 7:15 pm

    I bought Fortis recently and have been watching Saputo for a while. I've also been closely watching CN Rail - this is one I am really looking forward to buying

    • Reply
      February 17, 2016 at 12:22 pm

      We'd love to add more Fortis and CNR in our portfolio.

  • Reply
    February 18, 2016 at 8:57 pm

    I use to own DEO, I actually use to work for them and that is when I bought. At the time I bought them for around $70 and sold them once they reached $110. They are in good financial position and make a lot of cash but at $110 I thought they were about at the top of their range. I haven't looked lately but if they ever drop into the $90s I might look at them again. Just back in December I added CSW.A, Corby Spirits, I then added a few more shares when they dropped recently. They also generate great cash flow and have good financials. The big owner of shares of Corby is Pernod Ricard another big player in the global alcohol business. Corby's dividend is currently around 4.2% and what they have started doing lately is giving special dividends in January based on how well they performed during the year. They almost doubled their total year payout for 2015 with the special dividend in January. The only thing with Corby is their share price will not likely appreciate much as they are not buying new businesses as Pernod would do the buying. If Pernod buys something and then decides to divest it to Corby I guess they could grow. I bought it mainly for the solid dividend as I agree I think it is a good sector as it makes a lot of money.

    As for ADM, I do not own any shares in it but in agriculture / consumer products I own PBH and AGT. I have owned both for a while and the share price has appreciated a lot and I am actually trying to decide if I should sell, take the profits and invest elsewhere. Some other players in the area that I am watching are CLR and HLF.

    • Reply
      February 21, 2016 at 4:28 pm

      Hi Paul,

      Thanks for your input. DEO seems slightly expensive at current price level. I'd love to buy the stock in the $90s. I've been looking at Corsby Spirits for a while but haven't pulled the buy trigger.

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