Dividend stocks are one of the key components of a value investor's portfolio. The regular income provides increasing liquidity and compensation as you wait for the valuation thesis to play out. Typically, dividends tend to be a bonus as most value investing screens are run for valuation first. However, I also like to look at strong dividend stocks and then filter for undervaluation. These do not always offer strongest value stocks, but these will help protect your portfolio by including quality names that can weather a stock market downturn as I do expect to arrive any time soon.
This screen looks for quality stocks that pay a great dividend and are reasonably undervalued. The quality is determined by several dividend policy attributes, such as, dividend yield, historical dividend growth rate and the sustainability of the dividend as evidenced by the dividend coverage. A Price/Earnings ratio check keeps the valuation to be reasonable.
- Market capitalization > $30 million
- Dividend yield in top 20% of the market
- Dividend growth rate in top 40% of the market
- Dividend coverage in top 60% of the market
- P/E ratio < 15
- Sector is Consumer Discretionary and Consumer Staples
The screen was run using the Fidelity screener.
A great sustainable dividend yield, potential of dividend growth and good valuation allows you to buy and hold these stocks for a reasonably long term.
The Screen Results
div growth rate (5 YR Averge)
P/E (Price/TTM Earnings)
Block H&R Inc
Fiat Chrysler Automobiles NV
Goodyear Tire & Rubber Co
Movado Group Inc
Natural Health Trends Corp
Notes and Observations
- HRB: The tax prepared offers its services throughout the US, Canada and Australia through retail offices, both company owned and franchised locations. P&L is solid and consistent over the years, and unsurprisingly its Q4 (ending in April) contributes the bulk of its revenues and earnings. With steady dividend increases and healthy balance sheet, the company can be a great addition to a dividend oriented portfolio. Valuation today is fair.
- CCL: Another solid dividend growth stock. Carnival Corp is a behemoth in cruise and leisure travel market. Consistent revenues and earnings make this a solid hold for a dividend portfolio. Valuation is fair.
- FCAU: Falling auto sales across the globe, a failed merger with Renault and the Tesla threat makes automotive and specially Fiat Chrysler a very interesting stock to consider. The valuation is certainly cheap, but this is par for the course in automotive (except Tesla). I think automotive sector faces considerable substitution threats in the future - including changing driving behavior - as electric cars, ride sharing and other trends intensify. Consolidation in the sector is bound to continue. In this environment, I would not be inclined to make a long term investment in FCAU even with a great dividend yield.
- GT: On the other hand, Goodyear looks attractive for similar valuation and dividend yield as Fiat Chrysler. It has less substitution threat. There is an enhanced trade war risk for the company which is temporary in nature and likely to be not much of a concern to a long term dividend investor. I would like to review the stock in more detail and I am adding to the VSG watchlist.
- HBI: The apparel maker appears to be fairly valued. Steady to growing dividend and a great yield, but the valuation is not compelling enough for me to consider it further.
- MOV: A small cap luxury watch brand, Movado stock appears to be valued well and could be a great investment. However, if we do get a recession any time soon, luxury watches will likely see a significant drop in demand. From purely a macro perspective, I expect the prices can get even more attractive in the near future.
- NHTC: NHTC is a Hong Kong based dietary supplement and beauty products company. The company sells directly and on the web. 7.80% yield and a great dividend growth and cheap earnings multiple are all very attractive. However the key attraction surely is the $114 million in cash net of total debt when the market values the entire company at just $80 million. The undervaluation appears to be significant and if you are comfortable investing in Chinese stocks, this should definitely be worth a look.
From this screen, I am continuing forward with deeper diligence on GT (Goodyear). Most of these stocks can find themselves a home in any well constructed dividend portfolio. For me, dividends are important but secondary to valuation and GT makes the cut.
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