Long time readers of this blog know that I created this blog to chronical our financial independence journey. Although technically we can be financially independent today, we decided to take the slow approach. We decided that we call ourselves financially independent when our dividend income can cover our annual expenses. This is why I have been writing monthly dividend income updates since the beginning of this blog.
Today the team at Sure Dividend has graciously offered to examine our dividend portfolio and analyze five of their favorite stocks.
Please take it away Samuel from Sure Dividend.
Tawcan’s dividend portfolio currently generates more than $1,900 a month in dividend income. The goal of most dividend growth investors is to build a portfolio that produces steadily growing dividend income over the long run to reach true financial independence. Of course, the actual securities selected for your dividend portfolio matter a great deal.
We use a systematic and comprehensive quantitative and qualitative approach to analyzing and finding the best dividend growth stocks in the market trading at the most attractive prices at Sure Dividend. We believe that such an approach enables investors to make the “snowball effect” work for them to generate considerable long-term wealth.
This article examines five of our favourite stocks from Tawcan’s portfolio using our proprietary safety, quality, and total return formulas. The securities covered are: are AT&T, Domtar Corporation, The Royal Bank of Canada, National Bank of Canada, and Intel Corporation.
Table of Contents
Tawcan Portfolio Stock #1: AT&T
AT&T (T) is the largest communications company in the world, operating in four distinct business units: AT&T Communications (providing mobile, broadband, video and other communications services to U.S. consumers and more than 3 million businesses), WarnerMedia (including Turner, HBO and Warner Bros.), AT&T Latin America (providing advertising). The $250 billion market cap company, with over 260,000 employees, generates ~$170 billion in annual revenue.
AT&T is best viewed as a large, stable, and slow growing business. From 2007 through 2018 AT&T grew earnings-per-share by 2.2% per year. While the company is trying to grow faster and offset declines in its legacy businesses through its recent acquisitions of DirecTV and Time Warner, the company does bear a lot of debt and faces numerous challenges from competitors. As a result, we forecast growth remaining in the low single-digits for the foreseeable future.
Turning to valuation, shares remain cheap, trading at just ~9.5 times expected 2019 earnings versus an average multiple of 12-13 over the past decade. AT&T’s stable and gradually growing business model has also enabled it to grow its dividend for 35 straight years, combining with its 6% yield to make it one of the most attractive high dividend stocks around.
Tawcan Portfolio Stock #2: Domtar
Domtar Corporation (UFS) is a manufacturer of fiber-based products, including communication paper, specialty paper, packing paper, and adult incontinence products. The company operates in two business segments: Pulp & Paper, and Personal Care. The company operates 15 pulp and paper mills along with 13 conversion and distribution facilities. Domtar is headquartered in Montreal, Canada and has a market capitalization of $2.7 billion.
Its business is highly cyclical, as the prices for paper and related products tend to fluctuate as do its input costs. While earnings per share have considerable volatility from year to year, between 2009 and 2018 earnings-per-share rose by an average of 3% annually. Domtar’s margin improvement and share buyback programs should lead to continued growing earnings per share over the coming years, though results will likely remain highly cyclical. Domtar has also rapidly raised its dividend over the last decade. Since the payout ratio is not high, it is likely that the dividend growth will continue for the foreseeable future.
Domtar’s valuation is also attractive, with shares trading below 10 times this year’s expected profits, near its lows of the financial crisis. As a result, we think that shares could see considerable upside in the coming years, especially if earnings per share continue to grow as expected.
The company’s cyclicality means it is vulnerable to recessions, showcased by the fact that Domtar’s earnings-per-share plummeted sharply during the last financial crisis. Results also fluctuate during times when the economy is doing well, which makes Domtar a relatively high-risk investment.
Tawcan Portfolio Stock #3: The Royal Bank Of Canada
The Royal Bank of Canada (RY) is the largest bank in Canada by market capitalization, and the country’s second-largest bank by total assets, behind the Toronto-Dominion Bank (TD). The company offers banking and financial services to customers primarily in Canada and the U.S. and is a member of the Big 5 Canadian banks. It operates in five business units: Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets.
They Royal Bank of Canada has enjoyed strong growth over the past half-decade, compounding its earnings-per-share at a rate of 8.6% per year during that time span. In the years to come, RBC’s growth is expected to be driven by expansion into the large U.S. banking market.
Because of the bank’s size, stability, and strong and growing foothold in the U.S. market, it tends to trade at a premium to its peers in the Canadian banking industry. Still, the bank trades at a discount to many of its U.S. counterparts. Over the past decade, the average earnings multiple was ~12, and the bank currently trades at ~13 times 2019 expected earnings, making it slightly overvalued.
However, given its 3.8%, expected continued high single digit annual growth rate, and a payout ratio that is under 50%, the dividend is not only attractive and safe, but it should continue to grow for the foreseeable future. As a result, we see shares as capable of generating around 10% annualized returns over the next half decade.
Tawcan Portfolio Stock #4: National Bank Of Canada
National Bank of Canada (NA.TO) is the sixth-largest bank in Canada behind the Big Five banks and it owns a very impressive dividend growth history: since 1993, it has maintained or increased its dividend per share every year. Furthermore, its dividend growth momentum shows no signs of stopping any time soon as its 5 and 10-year dividend growth rates are 7.5% and 7.0%, respectively. In the past decade, this robust dividend growth was fueled by an earnings per share CAGR of more than 10%, despite facing a global financial crisis and a devastating oil price crash.
The main factor driving National Bank of Canada’s performance is the overall economic health of Quebec since it derives 58% of its revenue from the province., the bank’s growth rate is tied closely to the economic health of Quebec. While Quebec’s economy is overall considered to be pretty stable, lower residential investment is expected to cause slowing overall economic growth in the region. When compounded by a potential global economic slowdown in the coming years, National Bank could face significant growth headwinds.
National Bank currently trades nearly perfectly in line with its average earnings multiple of 10.3 over the last decade. However, its dividend yield of 4.3% alongside expected mid-single digit annual earnings per share growth, should drive total returns of close to 10% per year over the next half decade. As a result, we view it as an attractive dividend growth stock at current prices.
Tawcan Portfolio Stock #5: Intel
Intel (INTC) is the world’s largest manufacturer of microprocessors for personal computers and also manufactures products like servers and storage devices that are used in cloud computing. The company employs more than 100,000 people worldwide and generates ~$70 billion in annual sales.
Intel’s earnings per share growth since the last recession has been robust, averaging 14% per year. Since 2010, however, earnings-per-share have grown at just 7% per year and are expected to slow further to about 5% per year over the coming half decade.
Despite the slowing growth, Intel is still a cash cow, generating more than $14 billion in free cash flow in 2018 and returns all of it to shareholders via buybacks and dividends. Since 2008, the dividend has a CAGR of more than 8%, making it an attractive dividend growth stock.
Trading at 11 times expected 2019 earnings, Intel is trading at a meaningful discount to our fair value estimate of 13 times earnings. Combining the 2.6% dividend yield, the mid-single digit dividend growth potential, and the discounted earnings multiple, Intel should generate total returns of around 10% annually.
It is important to remember that Intel struggled mightily during the last recession and will likely do so again. As a result, it is not a low risk stock. Overall, we believe the solid expected returns here more than make up for the company’s recession risk.
Tawcan’s portfolio is filled with high quality dividend growth stocks. The five securities analyzed in this article are our favorites at current prices.
Investing in individual securities is not without its risks and market volatility. Focusing on dividend income can help self-directed investors stomach market downturns. That’s because high quality dividend growth stock income is very likely to fluctuate significantly less than share prices during recessions and bear markets.
Each of the stocks in this article – as part of a well-diversified portfolio of 20 to 30 positions – holds the potential at current pricing to generate strong total returns and income growth over the long term and can play a big role in helping investors achieve financial freedom and enjoy a corresponding higher quality of life.