Stock Picks for the Dividend Growth Index

Rising stock marketIn 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.

27 Responses to “Stock Picks for the Dividend Growth Index”

  1. cashflowmantra

    Oct 04. 2011

    I like Pepsi but don’t own it. Husky sounds interesting, and I really hadn’t thought about Staples as a solid dividend stock but it sure sounds promising. I like what you guys have done with the index.

    Reply to this comment
  2. My Own Advisor

    Oct 05. 2011

    Not much to say other than great stuff Ninja! :)

    Reply to this comment
  3. The Wealthy Canadian

    Oct 05. 2011

    I don’t know about CLC-T, but DAY-T certainly is the riskiest play of them all. I don’t think you’re stretching it by suggesting controversy :)

    Reply to this comment
  4. The Dividend Ninja

    Oct 05. 2011

    CashFlowMantra Thanx for posting! Husky is a 19.5 billion dollar oil and gas company here in Canada, it might make an interesting play as foreign content if you are a U.S. Investor (it is literally on sale but still in a downward trend). I keep looking at the basic fundamentals for Staples and like what I see, a long term value play.

    MOA Thanks!

    Wealthy Canadian Thanks as well!

    Cheers!

    Reply to this comment
  5. Serge Frégeau

    Oct 05. 2011

    I would have thought Canadian Oil Sands Ltd.(COS) preferable to Husky Energy (HSE). It has a better dividend (over 6% currently), a substantially lower payout ratio (55.8%). It went to 55$ in Spring 2008. As a bonus, a takeover remains a possibility. What was decisive for preferring Husky ?

    Reply to this comment
  6. Altior

    Oct 05. 2011

    With respect to Husky Energy and Canadian Oil Sands, it may be pointed out that the low P/E of Canadian Oil Sands is likely to provide better capital appreciation.

    Reply to this comment
    • The Dividend Ninja

      Oct 05. 2011

      Serge, Thanx for posting!

      The reason is pretty simple! I’m not looking for the top performer, and I’m not even trying to second guess which company may have better capital growth. I’m looking for good yield, safety, and more importantly – a diversified oil & gas player.

      COS is only an “oil sands” company, so it is not diversified. When oil prices are low, oil sands companies do not do as well as diversified oil & gas producers, like Husky Energy. Husky does everythign in oil & gas, not just oil sands.

      In addition COS has a variable dividned policy in relation to the price of oil and it’s Synscrude projects. It already cut the dividend back in December 2010, when converting to a corporation. Husky has never cut its dividend, and has a set dividend policy. Husky is a much safer bet in my opinion for dividend growth.

      Cheers!

      Reply to this comment
  7. The Dividend Guy Blog

    Oct 05. 2011

    15 years huh? man, we really need to get started if we want our index to worth something one day ;-) lol!

    Reply to this comment
  8. Dividend Mantra

    Oct 05. 2011

    Great job Ninja!

    I like your picks and I’m long on PEP and find it a pretty solid play at current prices. It’s high on my list right now.

    Best wishes!

    Reply to this comment
    • The Dividend Ninja

      Oct 06. 2011

      Thanx Mantra! If I had the cash to invest I too would buy PepsiCo Inc. (PEP-N). There are so many good companies at great prices right now!

      LOL I would also top up my bond ETFs as well :)

      Cheers!
      The Dividend Ninja

      Reply to this comment
  9. youngandthrifty

    Oct 06. 2011

    Great picks! I am thinking of buying Husky myself- it has such a strong dividend at this price.

    Reply to this comment
  10. Hank

    Oct 07. 2011

    I can understand your selection of Pepsi, but I’m a big fan of Dr. Pepper Snapple Group (DPS) instead which hasn’t nearly penetrated the market enough and has a huge stable of beverages.

    Reply to this comment
  11. The Dividend Ninja

    Oct 07. 2011

    Hank thanx for dropping by… FinCon11 was amazing!

    Dr Pepper Snapple Group (DPS-N) certianly has great fundamentals, dividend-payout-ratio etc other than the debt level. The debt-to-equity ratio being 110. But PepsiCo (PEP-N) also carries a similar debt load, with a debt-to-equity ratio of 112. I just like to bet on a a larger market capitalization stock :)

    Cheers!
    The Dividend Ninja

    Reply to this comment
  12. Some Canadian Person

    Oct 07. 2011

    “Husky has never cut its dividend,…”

    Sorry, they have, quite drastically from $0.50 to $0.30 per share in early 2009.

    http://seekingalpha.com/article/118724-husky-energy-dividends-get-cut-more-companies-to-follow

    Reply to this comment
  13. The Dividend Ninja

    Oct 07. 2011

    Some Canadian Person OK thanx for the correction and pointing that out ;)

    Reply to this comment
  14. Rock the Casbah

    Oct 08. 2011

    Agree w/ you and D Mantra on PEP. I recently bought some @ about $60 and think It’d be a great long term play. I compared them to KO and found PEP to be a bit better value right now. Plus more diversified (snacks/food as well) w/ a bit higher yield. Ethics were a bit of a factor for me as well as Pepsico seems to be a be taking positive steps on sustainability and expanding healthy choices (I still love those Fritos and Mountain Dew though – LOL).
    Nothing wrong w/ KO though as it’s a near bulletproof stock and I might buy some in the future but I choose PEP right now.
    Great that Div Growth investor joined the DGI. I’ve been on his site a few times and especially like his individual stock analysis. Looks like another dividend superhero joined the project. But you still have the best cyber name Ninja. :)

    See ya.

    Reply to this comment
  15. The Dividend Ninja

    Oct 08. 2011

    Rock the Casbah thanx! it’s good to have Ninja fans :)
    I did choose PEP over KO, not that I think it’s a better pic than KO – it’s like comparing apples and oranges. But I also think PEP is a better value play between the two companies.

    Cheers

    Reply to this comment
  16. Altior

    Oct 20. 2011

    Did you consider Enerplus as an alternative to Husky Energy ?
    Historically, it is a good performer. It has a low P/E (9.1) and a great dividend (7.9). Is this stock to be covered in your next article in November ?

    Reply to this comment

Trackbacks/Pingbacks

  1. My Own Advisor » Weekend Reading – Thanksgiving edition » My Own Advisor - October 6th, 2011

    [...] Dividend Ninja [...]

  2. Weekend Ramblings and PF Blog Love: Lowered Expectations Edition | youngandthrifty.ca - October 7th, 2011

    [...] (by the way, IMHO dividend bloggers are the TRUE PF bloggers lol) are getting together to do a stock picking contest for their dividend growth index.  Check it out! (I like his picks, thinking of buying some HSE [...]

  3. October Net Worth Update +0.8% | youngandthrifty.ca - October 10th, 2011

    [...] really interested in buying HSE.TO (Husky) and Dividend Ninja picked this stock in his Dividend Growth Index as well.  However I don’t have much capital at the moment.  I’ll need to do some [...]

  4. Dividend Monk’s Three Picks for the Dividend Growth Index — Dividend Monk - October 10th, 2011

    [...] Dividend Guy Dividend Mantra My Own Advisor The Passive Income Earner Dividend Ninja The Wealthy Canadian Dividend Growth Investor Dividend [...]

  5. The Dividend Ninja » The Dividend Growth Index – Q4 2011 - January 4th, 2012

    [...] (PEP-N), and Staples (SPLS-Q). I covered my reasons for these three picks in my second DGI post, Stock Picks for the Dividend Growth Index.  For the three months ending December 31st, 2011, my three stock picks returned 8.9% (9.43% [...]

  6. The Dividend Ninja » The Dividend Growth Index – Q1 2012 - April 5th, 2012

    [...] Stock Picks for the Dividend Growth Index [...]

  7. Loyalty – One Of The Biggest Stock Picking Mistakes I Make | The Dividend Ninja - May 12th, 2012

    [...] for Dr. Pepper and its vast stable of beverages months ago when the Dividend Ninja first mentioned buying shares of PepsiCo Inc. He was quick to point out that PepsiCo has several things going for it that Dr. Pepper [...]

  8. The Dividend Growth Index – Q2 2012 | The Dividend Ninja - July 21st, 2012

    [...] Stock Picks for the Dividend Growth Index [...]

Leave a Reply

*