In my last post I introduced readers to the Dividend Growth Index, a project created by Mike at the Dividend Guy Blog. With the Divided Growth Index (DGI), we’ve received a lot of comments and feedback about the project. Readers are getting involved, selecting their picks, and finding value in following the project. My Own Advisor and The Wealthy Canadian have also created some controversy (dare I say) with their picks of Daylight Energy (DAY-T) and CML Healthcare (CML-T). These are both high-yield stocks that could be at risk of dividend cuts!
When you think about it, it is quite amazing to see seven (now eight) dividend investors contributing their expertise, following their selected companies, and collaborating together. The long term value from this project in my opinion is to see how the DGI performs in comparison to the benchmarks, and how the dividend income will compound over time. Andrew Hallam left an interesting comment on my previous post about the DGI. He states you really need to test the Dividend Growth Index for at least 15 years to see how these companies are doing. But it’s the unexpected tests and market changes that will provide to be most interesting, and how DGI will perform in those situations.
And Then There Were Eight
Last week Dividend Growth Investor joined into the Dividend Growth Index, and his three picks are Chevron (CVX-N), McDonald’s (MCD-N), and Enterprise Product Partners (EPD-N). This now brings the Dividend Growth Index up to 24 companies, with 8 investors choosing three stocks each. You can view the revised holdings at my previous post, Introducing the Dividend Growth Index.
Sector Allocation and Weighting
Obviously adding three more stocks to this index has shifted the dividend yield and sector weightings. For example, the overall dividend yield has decreased from 4.27% to 4.15%. The sector weightings have also shifted. Consumer Stapes now comprise 25% of the index compared to the previous 29%. The Oil & Gas Sector has jumped from 24% to 29%, etc. This means that 55% of the entire portfolio is still spread across only 2 sectors, and 71% of the portfolio is spread in only three sectors.
As I mentioned in my previous post on the DGI, anytime you shift a portfolio away from an equal weighting you increase volatility and risk. If oil prices should continue to decline, or consumers pull back their spending, then that will drag the DGI below index performance. On the other hand, if oil prices rise again, or consumer and staple stocks do well in the months to follow, then the DGI Index will also do very well. Weighting a portfolio like the DGI can really become a double-edged sword that can leave your returns on either side of the scale. But what it goes to show you, is eight dividend investors have enough confidence in these two sectors alone to hedege their bets.
My Three Stock Picks
The three companies I selected for the Dividend Growth Index are companies I have been following for months or have purchased. I think PepsiCo Inc. (PEP-N) is a no-brainer in terms of its solidity and value. But many people are surprised with my selection of Staples Inc. (SPLS-Q), a potentially solid value play. Here are my three stock picks, and why I have selected theses companies for the Dividend Growth Index (DGI):
Husky Energy (HSE-T)
Husky Energy (HSE-T) is one of Canada’s leading oil and gas producers. It also has a very generous dividend yield of 5.30%, which is one reason dividend investor’s flock to this company. I covered Husky Energy back in December 2010 – My Stock Picks for 2011. I outlined the reasons why I felt Husky was an excellent long-term investment opportunity, even with its declining share price. The same fundamentals are still in place.
To summarize, Husky Energy is currently trading at $21.49 CAN per share, that’s off some 59% from its high of $52.32 in May 2008. Husky also has a P/E Ratio of 12.79, a dividend payout ratio of 72%, and a low debt-to-equity ratio of 27.90. The balance sheet fundamentals are remaining solid, under the new CEO Asim Ghosh. What I like about Husky the most is that it is a diversified oil and gas producer, unlike a dedicated Natural Gas producer such as Encana. It has interests in oil drilling, oil refineries, natural gas, the tar-sands, and even has interests in Asia.
PepsiCo Inc. (PEP-N)
In a recent post I did for Dividend Stocks Online, U.S. Stocks on Sale, PepsiCo Inc. was one of my top picks. Brand recognition is one of the most important factors among the consumer staples, and Pepsi has it! PepsiCo Inc. is generally considered a bell-weather consumer staple that will do well in both good and bad economic times. However, with the recent run up in commodity prices this year, PepsiCo found it difficult to raise its prices to offset these costs, and this eventually affected its bottom line. A less than stellar earnings report on July 21st, 2001, sent PepsiCo shares down -6.7% in a few days. PepsiCo has a market capitalization of 95 billion dollars, a P/E ratio of 15.34, a dividend payout ratio of 52.4%, and a debt-equity ratio of 0.99. The current dividend yield is 3.30%. PEP is currently trading at US $60.00 per share.
Staples Inc. (SPLS-Q)
Some readers and fellow bloggers have been surprised with my selection and recent purchase of Staples Inc. I reviewed Staples back in May – Staples Inc. Value in Office Supplies?. I then reviewed this office retail giant again in August – Why I Bought Staples Inc.
I found that Staples was the dominant player in the office sector, dwarfed its competitors, and had low debt. It appeared to be a well managed company stuck in the retail sales doldrums. In addition, its main competitor Office Depot (ODP-N) had already started closing its Canadian retail locations. In a sense, all these factors give Staples an economic moat in the office supplies sector. Many retail stocks back in May were out of favour, due to a lack of consumer confidence and spending. So I kept Staples on my watch list, even with its low dividend yield, with the intention to purchase before September back to schools sales. According to the Dynamic Dividend, Staples is also a company which regularly increases its dividend:
“Staples began returning cash to shareholders in 2004, and has raised its annual dividend total in six of the ensuing seven years, with 2009 (the year it transitioned from annual to quarterly payouts) being the only exception. With its 11% dividend hike earlier this year, the company has now tripled its payout during its short stint as a dividend-payer.”
Staples Inc. is my long-term value play, as it is trading at a low price level of $12.79 per share, has a solid balance sheet, and is not a popular stock. Staples has a market capitalization of 9.07 billion dollars, a P/E ratio of 9.81, a dividend payout ratio of 30.7%, and a debt-equity ratio of 32.18. The current dividend yield is 3.00%.
Readers, what are your thoughts about the Dividend Growth Index? What three stocks would you pick? Do you like my picks?
Disclaimer: I am long on Staples (SPLS-Q), and intend to buy both Pepsi (PEP-N) and Husky (HSE-T). The Dividend Ninja is not a professional financial advisor or an investment dealer. This article is not intended as a buy recommendation, and is not intended to provide financial advice. The Dividend Ninja is not responsible for the investment decisions you make.