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?

Written by Tawcan
Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way. Stay in touch on Facebook and Twitter. Or sign up via Newsletter