Editor's Pick: Originally Published Tuesday, Dec. 22
The VIX Index is creeping higher as investor fear rises. 2015 is nearly over and 2016 promises to bring great uncertainty:
- 2016 Presidential election
- Continuing threats from ISIS
- Possibility of more rate increases
How can you prepare for instability and uncertainty? By investing in high quality, blue chip dividend stocks with shareholder friendly policies that have historically withstood the test of time.
All of the dividend stocks in this article have paid steady or increasing dividends for at least 25 years.
You shouldn't buy into a high quality business at any price. The 10 high quality businesses in this article are all trading at fair or better prices. They are ready for your purchase today -- in time for 2016.ADM data by YCharts
1. Archer-Daniels-Midland (ADM)
Archer-Daniels-Midland is the largest farm products corporation in the world. The company currently has a market cap over $20 billion. The company's success is built on a long corporate history. It has paid increasing dividends for 40 consecutive years.
Despite its long history of success, Archer-Daniels-Midland's share price is depressed. The company's stock has fallen over 30% in 2015.
Falling grain and corn prices are likely responsible for the stock's poor performance. The company's management has responded to low stock prices by repurchasing nearly 6% of shares outstanding over the last year alone. Share repurchases done when a stock is trading below fair value are especially beneficial for shareholders. It's like buying one dollar for seventy cents.
Archer-Daniels-Midland still has favorable growth prospects ahead. Crop prices are cyclical -- they are low now, but they will rise, depending on a variety of uncontrollable factors.
Archer-Daniels-Midland's management is slowly reducing the company's exposure to volatile crop prices by focusing on higher value products. The company's WILD Flavors acquisition and creation of the new WILD Flavors & Specialty Ingredients segment is a push toward higher margin products.
The long-term growth driver for ADM is increasing global food consumption. The global population is growing. More people means more mouths to feed and greater demand for commodity foods.
Archer-Daniels-Midland stock is currently trading for a price-to-earnings ratio of just 12.2. In addition, the stock offers investors an above-average dividend yield of 3.2%. Archer-Daniels-Midland's combination of high yield, low valuation, and favorable long-term growth prospects make it a favorite of The 8 Rules of Dividend Investing.
2. ExxonMobil (XOM)
Oil prices have declined by around 60% in the last year-and-a-half. As the largest oil corporation in the world, one would expect ExxonMobil's profit engine to sputter.
Despite low oil prices, ExxonMobil is expected to generate around $17 billion in profits in fiscal 2015. The company's ability to generate sizeable profits in all economic climates is a result of its diversified business model.
ExxonMobil is well-diversified within the oil and gas industry, operating in three segments: upstream, downstream, and chemical. The company's earnings by segment in its most recent quarter are shown below:
- Downstream earnings of $2.03 billion
- Upstream earnings of $1.36 billion
- Chemical earnings of $1.23 billion
While $17 billion in profits in 1 year would be exceptional for most businesses, it is far from ExxonMobil's peak. The company made over $45 billion in fiscal 2007 when oil prices spiked.
With ExxonMobil, you invest in a company with the ability to generate tremendous cash flows when oil prices are low. When oil prices rise, ExxonMobil's profits rival Apple's.
ExxonMobil's primary business growth driver is rising global energy demand. Global energy demand is expected to increase by around 1% a year over the next several decades. As the industry leader, it is likely ExxonMobil grows (over the long run) at a faster pace than energy demand growth. Expect the company to grow revenue between 1% and 3% a year.
In addition, ExxonMobil has historically averaged share repurchases of around 3% a year. Technological advances and efficiency improvements make it likely the company will be able to expand margins at around 1% a year (excluding the effects of oil price changes). Finally, ExxonMobil stock currently offers investors a dividend yield of 3.8%. Investors should expect total returns of 8.8% to 10.8% a year over the long-run from ExxonMobil stock.
3. Cummins (CMI)
Cummins is the global leader in diesel engine manufacturing. The manufacturing segment in general has taken a hit recently due to slowing growth in emerging markets and a strong United States dollar.
Cummins is no exception. The stock is down nearly 40% this year. Now is an excellent time to buy into this industry leader for cheap.
Cummins has a long corporate history. The company was founded in 1919 and has paid steady or increasing dividends every year for 25 consecutive years.
Despite being close to 100 years old, Cummins is far from slowing down. The company hiked its dividend payments 25% this year. In addition, Cummins stock has a tremendously high dividend yield of 4.6% -- and a payout ratio of just 35.4%.
Cummins appears deeply undervalued at current prices. The stock is trading for a price-to-earnings ratio of just 9.1. With such a low price-to-earnings ratio, you'd think Cummins has poor growth prospects, but that's not the case.
Cummins has compounded earnings-per-share at an annual rate of 14.3% a year over the last decade. The company has several growth drivers that will increase earnings over the long run:
- Organic growth in emerging markets
- margin improvement
- stock repurchases
In addition, the company is purchasing its joint-venture distributors and consolidating operations, reducing costs and increasing profits. Despite current headwinds, I expect above-average long-term growth at Cummins.
Cummins offers investors a unique combination of:
- High 4.6% dividend yield
- Excellent long-term growth potential
- Deep value with a price-to-earnings ratio under 10
Investors in Cummins will very likely realize excellent total returns over the next several years.
4. Wal-Mart (WMT)
Wal-Mart stock has not performed well in 2015. The company's shares are down about 30% on the year. Wal-Mart is currently trading for a price-to-earnings ratio of 12.6, with a well-above-average 3.3% dividend yield.
Wal-Mart shares have declined significantly this year because earnings have trailed off somewhat. The company is investing heavily in the future by raising employee wages and expanding its digital operations.
In the short-run, these activities will cause margins to decline. They will also reposition Wal-Mart for growth. It's not like Wal-Mart is unprofitable right now... The company has raked in $15 billion in earnings in the last 12 months.
What's more, Wal-Mart is one of the best bear market stocks to invest in for safety. From the beginning of 2007 to the end of 2009, the S&P 500 fell 16%, while Wal-Mart stock gained 19%.
When times get tough, people look to save money. Wal-Mart has a reputation of being the low-cost leader. As a result, it tends to thrive during recessions. The company's earnings-per-share grew each year through the Great Recession of 2007 to 2009:
- 2007 earnings-per-share of $3.16
- 2008 earnings-per-share of $3.42
- 2009 earnings-per-share of $3.66
Wal-Mart scores high marks for safety and consistency. The company has paid increasing dividends every year for 42 consecutive years. The company also regularly engages in share repurchases. Put simply, Wal-Mart is a shareholder-friendly company.
Wal-Mart is trading near its highest dividend yield in its entire history. Now is the perfect time to initiate (or add to) a position in this high quality, recession proof discount retailer.
5. Deere & Company (DE)
Deere & Company is the largest manufacturer of farming machinery in the world.
The company also manufactures forestry and construction equipment and operates a financing division to help customers finance expensive equipment.
Deere & Company has paid steady or rising dividends for 27 consecutive years; the company's management has a long track record of being shareholder-friendly.
Deere & Company is one of Warren Buffett's highest yielding dividend stocks. It currently makes up about 13% of Buffett's portfolio.
Deere & Company is one of Warren Buffett's most recent purchases. Grain prices fluctuate. Low grain prices mean less income for farmers, and less purchases of Deere & Company's farming machinery. Before you get too bearish on Deere & Company, realize the company has profits of nearly $2 billion over the last 12 months despite declining grain prices.
The company is a timely buy as it is nearing its cyclical trough. When grain prices rise, Deere & Company's earnings (and possibly its price-to-earnings multiple) will rise as well. This will cause the stock price to increase, and shareholders who bout in during cyclical lows will be rewarded.
Long term growth prospects are bright for Deere & Company. Increased affluence and population growth in emerging markets will likely drive demand for food, grains, and farming equipment globally. Over the last decade, Deere & Company has averaged earnings-per-share growth of over 12% a year.
Deere & Company is currently trading for a price-to-earnings ratio of just 13. The company's stock has a dividend yield of 3.2% as well. Now is an excellent time to join Warren Buffett in holding this high quality farm equipment industry leader.
6. W.W. Grainger (GWW)
W.W. Grainger is the industry leader in the maintenance, repair, and operations (abbreviated as MRO) industry. The company was founded in 1927 and has paid increasing dividends for 43 consecutive years. This makes W.W. Grainger one of just 51 Dividend Aristocrats -- stocks with 25+ years of consecutive dividend increases in the S&P 500 Index.
A company can't increase its dividend payments for 40+ years without a strong and durable competitive advantage. W.W. Grainger's competitive advantage comes from its excellent supply chain network. W.W. Grainger has a network of 713 branches and 34 distribution centers -- this makes it much larger than its competitors. W.W. Grainger's size gives it a scale advantage as well.
The MRO industry is highly fragmented; W.W Grainger is the industry leader and controls just 6% of the market in North America. W.W. Grainger uses its industry leading size to make bolt-on purchases and consolidate the MRO Industry. This strategy is the driver behind W.W. Grainger's 15% per year earnings-per-share growth over the last decade.
W.W. Grainger has excellent growth prospects ahead -- especially with its e-commerce operations. W.W. Grainger owns the following e-commerce sites:
MonatoRo sales are expected to come in at $500 million in fiscal 2015. W.W. Grainger is expecting MonatoRo sales to double to $1 billion in just 5 years. Rapid growth is expected in the Zoro and Cromwell operations, as well.
W.W. Grainger stock currently has a dividend yield of 2.4% and is trading for a price-to-earnings ratio of just 16.8. The company's price-to-earnings ratio does not reflect W.W. Grainger's excellent long-term growth prospects, strong competitive advantage, and shareholder-friendly management. The stock is very likely undervalued at current prices.
7. Phillips 66 (PSX)
Phillips 66 actually benefits from low oil prices. The company generates over 75% of its earnings from refining oil and selling chemical products.
Oil is the primary input cost for Phillips 66's chemical products. When oil prices fall, chemical profits rise. Similarly, when oil prices fall, oil companies must produce more oil to generate the same amount of profits. This increases demand for Phillips 66's refineries.
Phillips 66 will generate robust earnings regardless of oil prices. As a result, it is an all-weather oil stock -- the opposite of large upstream oil corporations (like Conoco Phillips).
It's no secret Warren Buffett likes stability -- maybe that's why he has purchased over $4 billion of Phillips 66 stock this year.
Phillips 66 stock currently offers investors a dividend yield of 2.8% -- well above the S&P 500's dividend yield of 2.1%. The company has not reduced its dividend payments in 27 years (counting its history with ConocoPhillips).
The company's management is very shareholder-friendly. In addition to its long dividend history, Phillips 66 also regularly repurchases shares.
Phillips 66 will generate growth through large capital intensive investment projects. The Sweeny Fractionator is one such project. The Sweeny Fractionator project was started in 2013 and is expected to be complete in the third quarter of 2015. The fractionator is located in Old Ocean, Texas near Phillips 66's refineries.
Phillips 66 is also building an LPG export terminal in Freeport, Tx. The LPG export terminal will leverage the company's transportation and storage infrastructure in the area. In total, the export terminal is expected to handle 4.4 million barrels a month of export
Despite Phillips 66's stability, above average dividend yield, and potential growth from new projects, the company has a low price-to-earnings ratio of just 9.4. Phillips 66 is very likely undervalued at current prices.
8. Helmerich & Payne (HP)
Helmerich & Payne is the industry leader in North American fracking. The company has a market cap of $5.4 billion. Low oil prices have caused Helmerich & Payne shares to decline more than 22% in 2015.
These declines have given Helmerich & Payne a high dividend yield of 5.5%. (Click here to see 11 other high dividend stocks.) In addition to its high yield, Helmerich & Payne rapidly compounds earnings-per-share when oil prices are not collapsing. The company has generated 22% per year earnings-per-share growth over the last decade.
Helmerich & Payne is partially insulated from recessions and low oil prices thanks to well-managed contracts with its customers. The company generally uses three-year contracts with early termination payment clauses to help offset declining earnings from falling oil prices.
This strategy worked during the Great Recession; the company's earnings-per-share declined only 26% through the Great Recession, better than many oil and gas giants (including ExxonMobil). Helmerich & Payne expects to generate $220 million in total from early cancellation fees in fiscal 2015
This is not the first time the company has paid dividends through a difficult period -- Helmerich & Payne has paid steady or increasing dividends every year since 1987.
Helmerich & Payne is deeply undervalued at current prices. The company is trading for a price-to-earnings ratio below 13 (and that's using depressed earnings numbers). When oil prices rise, investors in Helmerich & Payne will very likely see both rapid earnings growth and an upward revision in the company's price-to-earnings multiple. In the meantime, investors in Helmerich & Payne will generate current income from the company's 5.5% dividend yield.
9. Johnson & Johnson (JNJ)
Johnson & Johnson is the largest health care corporation in the world. The company was founded in 1886 and currently has a market cap of more than $280 billion.
There are two telling numbers to remember when analyzing Johnson & Johnson stock: 31 and 53. As in 31 consecutive years of adjusted earnings-per-share increases and 53 consecutive years of dividend increases.
In addition to these impressive metrics, Johnson & Johnson has one of the lowest stock price standard deviations of any company. With its low volatility and long history of predictable growth, Johnson & Johnson has more in common with a utility (except it has better growth prospects) than with most other health care corporations.
The secret to Johnson & Johnson's stability is its wide diversification within the health care industry. The company operates in three segments: consumer, pharmaceutical, and medical devices. The company controls many household-name over-the-counter medical brands in its consumer segment: Band-Aid, Listerine, Tylenol, and Motrin (among many others).
Johnson & Johnson has grown earnings-per-share at a compound rate of 6% a year over the last decade. This stable company should continue to grow earnings-per-share at around the same rate going forward. In addition, the company has a dividend yield of 2.9%.
Johnson & Johnson has a forward price-to-earnings ratio of just 15.8. The company is either fairly valued or somewhat undervalued at current prices. Johnson & Johnson's stability and shareholder friendly policies make it a "forever" stock - the type of dividend growth investment you can make once and hold for the long run.
10. Procter & Gamble (PG)
Procter & Gamble is the largest diversified consumer goods corporation in the world. The company was founded in 1837 and sells its products in over 180 countries.
Procter & Gamble has increased its dividend payments for a (nearly) unbelievable 59 consecutive years. This makes Procter & Gamble one of only 17 Dividend Kings -- stocks with 50 or more years of consecutive dividend increases.
The company's brand portfolio is filled with easily recognizable consumer brands. Procter & Gamble breaks its operations into 10 brand categories. Each is shown below along with key brands in the category:
- Oral Care: Key brands are Crest and Oral-B
- Baby Care: Key brands are Pampers and Loves
- Family Care: Key brands are Bounty and Charmin
- Feminine Care: Key brands are Always and Tampax
- Grooming: Key brands are Gillette, Venus, and Braun
- Fabric Care: Key brands are Tide, Ariel, Gain, and Downy
- Personal Health Care: Key brands are Metamucil and Nyquil
- Skin & Personal Care: Key brands are Olay, SK-II, and Old Spice
- Home Care: Key brands are Dawn, Febreeze, Swiffer, and Cascade
- Hair Care: Key brands are Pantene, Head & Shoulders, Herbal Essence, and Rejoice
Procter & Gamble's industry leading size gives it a strong competitive advantage -- it can outspend its rivals in advertising its products. More advertising spending means a greater ability to build and promote brands that consumers want. Procter & Gamble spends between $8 and $9 billion a year on advertising.
The company has not delivered acceptable growth over the last few years as management over-expanded the company's brand portfolio. Procter & Gamble has refocused. The company has shed its non-core brands and is focusing on efficiency. Fewer brands means more advertising spending for the company's best brands -- which will very likely generate better growth and margins.
Procter & Gamble is currently trading for a forward price-to-earnings ratio of 18.5. The company is likely trading around fair value at current prices. Procter & Gamble is a shareholder friendly company with a 3.4% dividend yield. The company operates in a low tech industry -- this means the company's competitive advantage is long lasting (as evidenced by 50-plus years of consecutive dividend increases). Like Johnson & Johnson, Procter & Gamble is a "forever" investment that will likely continue compounding shareholder wealth for decades ahead.