This is a guest contribution from Ben Reynolds. Ben runs Sure Dividend, which is dedicated to finding high quality dividend growth stocks suitable for long-term investing using The 8 Rules of Dividend Investing.
The historical average price-to-earnings ratio for the S&P 500 is 15.6. The S&P 500’s current price-to-earnings ratio is 24.2. From a historical perspective, the market is very clearly overvalued.
It’s important to remember that the stock market is made up of individual stocks. Not every member of the S&P 500 has a price-to-earnings ratio of 24.2. Some are much higher, others much lower.
It is still possible to find great businesses trading at fair or better prices in today’s market. This article takes a look at several different tools and lists to do just that.
Dividend Idea Generator #1: Other Dividend Investors Portfolios
Many dividend bloggers share their own portfolios for others to view. You can see Sabeel’s portfolio here (of Roadmap 2 Retire). Sabeel’s portfolio is loaded with both high yield and high quality dividend growth stocks.
An example is Archer-Daniels-Midland (ADM). Archer-Daniels-Midland currently has a dividend yield of 2.9% and price-to-earnings ratio of 16.1. The company’s forward price-to-earnings ratio is even lower at 14.3.
Archer-Daniels-Midland is a has paid increasing dividends for 41 consecutive. The company is also the largest farm procucts company in North America by a wide margin with its $24.8 billion market cap. For comparison, its next largest competitor Bunge (BG) has a market cap of $8.2 billion.
You can read more about Sabeel’s purchase of Archer-Daniels-Midland here.
Dividend Idea Generator #2: Aristocrats, Kings, and Champions
Archer-Daniels-Midland is not the only business with a long dividend history. There are a total of 50 businesses with 25+ years of consecutive dividend increases in the S&P 500. Collectively, these businesses are known as Dividend Aristocrats.
You can download a list of all 50 Dividend Aristocrats here, along with several relevant financial metrics for each.
But Dividend Aristocrats are not the end-all-be-all of dividend paying stocks with long dividend histories. That’s because the Dividend Aristocrats index only includes stocks in the S&P 500.
The Dividend Champions list goes beyond the S&P 500. It includes 108 businesses with 25+ years of consecutive dividend increases (more than double the number in the Dividend Aristocrats Index). You can see the full list of Dividend Champions here.
Even the Dividend Champions are not the pinnacle of dividend longevity…
That honor belongs to the Dividend Kings. The Dividend Kings list includes just 18 businesses. It is extremely exclusive. To be a Dividend King, a stock must have increased its dividends for 50+ consecutive years.
Some of the most well-known businesses are Dividend Kings, including:
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
- Coca-Cola (KO)
You can see all 18 Dividend Kings here.
Dividend Idea Generator #3: Stock Screeners
Looking at other people’s portfolio and lists of long-term dividend stocks is not the only way to find compelling dividend investments.
Long-term dividend stock lists leave out many high quality businesses. Hershey (HSY) is a great example. The company did not increase its dividend in 2009. There’s little doubt Hershey is a high quality business with a strong and durable brand based competitive advantage… And yet it is not a Dividend Aristocrat, Champion, or King.
That’s where stock screeners come in. I don’t know of any stock screener that sorts by dividend history, but there are plenty of other relevant metrics you can use to quickly identify dividend growth stock investment candidates.
My favorite stock screener (and it’s free to use!) is Finviz. The Screener in Finviz gives you a very wide range of financial ratios and metrics to choose from.
One interesting screen is to look for high dividend, low payout ratio stocks. These are businesses that are rewarding shareholders with high dividend yields, and have a high margin of error with there low payout ratios.
As a bonus, high yield low payout ratio stocks are by definition low price-to-earnings ratio stocks. A little algebra tells us that the payout ratio divided by the dividend yield equals the price-to-earnings ratio. High yield, low payout ratio stocks are also value stocks.
In Finviz, the dividend yield screen is under the ‘Descriptive’ tab. The payout ratio screen is under the ‘Fundamental’ tab.
Exactly what you define as a ‘low payout ratio’ and a ‘high dividend yield’ is subjective. I define high yield as anything at 3% or above in today’s low interest rate environment.
For the payout ratio, I chose a payout ratio under 50%. While 50% isn’t ‘low’, it does provide a high level of safety from dividend cuts in the event earnings decline.
Setting Finviz to find stocks with a payout ratio of under 50% and a dividend yield higher than 3% yields 177 results (at the time of this writing). I sorted them by market cap. The top 10 are listed below:
- Wells Fargo (WFC)
- JP Morgan (JPM)
- Toyota Motors (TM)
- Intel (INTC)
- IBM (IBM)
- Cisco (CSCO)
- Royal Bank of Canada (RY)
- China Life Insurance Co. (LFC)
- Toronto-Dominion Bank (TD)
- Reynolds American (RAI)
The market is overvalued historically today. Dividend yields are near historical lows. But that doesn’t mean there are no good investments today.
This article presented 3 ways to find compelling dividend stocks for further research. No matter what level the market gets, there will always be underappreciated individual businesses, and often complete industries in the market.
The ‘Internet Bubble’ is a great example – tech stocks soared. The market completely forgot about ‘old world’ blue-chip dividend stocks. Many could be purchased at very good prices. All forms of investing cycle through periods of popularity and periods of pessimism. Buying great dividend paying businesses when they are on sale has historically worked well, and will likely continue to do so.