December has had another run-up in stock prices. Finding an undervalued dividend stock is becoming difficult, but we all know there are diamonds to be found – diamond dividend stocks, that is. Therefore, it is time to pour a hot cup of coffee and begin my dividend stock research. Time to tune in for Lanny’s Dividend Stock Watch List – January Edition.
Dividend stock watch list
The market is up 2.74% from November 27 through December 27th (30 days, including the 27th).
What occurred during the month to have the market slightly increase? Well, the retailers made out like bandits, setting records for online and overall shopping. Lastly, “better” headway for the trade deal with China occurred. This has caused the market to continue the trend up. Consumer sentiment is positive, strangely.
However, as the saying goes, one can always find diamonds in the rough. Therefore, there is always an undervalued dividend stock up for grabs, just need to look hard enough.
Here is a display of what the market did in the last 30 days:
In addition, capital is necessary to make any dividend stock purchase that is on this watch list. How do I do it?
I save anywhere from 60-85% of my take-home pay and strongly believe Financial Freedom does not happen by hitting a home run on an investment. Nothing matters more than your savings rate on your journey to Financial Freedom, plain and simple. Therefore, I work my butt off to make sure expenses remain in check and that my savings rate is meeting our investment and financial independence goals! Then, you rinse and repeat.
Can we say the company is on my watch list for two months in a row?! Yes, this is true, but it deserves a spot. You’ll see why below.
Shell has reported 8 strong quarters in a row, and I anticipate the same results for the 4th quarter. The company will generate between $350 and $360 billion in total revenue for the year and will maintain costs at around $320-330 billion. Therefore, it’ll have that 8-10% margin built in before taxes.
Shell is currently trading at $59.11 (up by $0.67 from $58.44 in the last article), and there is an estimate of earnings per American Depository Share of approximately $5.51 for 2020. Therefore, you are looking at a price-to-earnings ratio of 10.73, which is significantly below the S&P 500 or the stock market on average, as well as other big oil players, including Chevron (NYSE:CVX).
In addition, based on the $5.51 average analyst estimate, their payout ratio is looking better. The annual dividend is $3.76 per year, or $0.94 per quarter. The dividend payout ratio is at 68%. For a large oil company, this actually is not the worst I have seen. In fact, it is better than Exxon Mobil (NYSE:XOM), which currently shows over 100% for its payout ratio. Chevron’s payout ratio is similar to Shell’s.
Shell has had its dividend on pause over the past 5-6 years, dating back to 2014. The dividend growth was just not there, and instead of cutting its dividend during the oil & gas downturn, the company chose to maintain it and work on its expenses and balance sheet. It has shown over the past 24 months that there is a better picture to increase the dividend going forward, starting in potentially 2021. In the meantime, as a current shareholder, I have been enjoying the higher-than-normal dividend yield (fluctuating between 5.50% and 9.50%).
Given that Shell yields 6.36% makes a compelling argument to acquire more shares, as the company continues to improve its financial footprint and gear up for 2021.
Cisco Systems, Inc. (NASDAQ:CSCO)
I haven’t talked about Cisco in quite some time. I last purchased it in August 2017 at a share price of $31.52. Well, the shares don’t trade that low anymore. In fact, they are now trading at $47.77 – a 52% growth over the last 2 years of owning them, whoa!
The company has gone from making $0.48 at Q3’s quarterly net income to $0.69 in the most recent quarterly net income. That’s a growth rate of almost 50% as well over that time period. In addition, the quarterly dividend has gone from $0.29 to $0.35 per quarter, or a 21% growth. The stock price appreciation has definitely outpaced the growth of the dividend, that’s for sure.
How about the metrics? Cisco currently sports a 2.93% dividend yield, definitely above the market on average. The one downside is that the company trades slightly below its 5-year yield average of 3.01%. In addition, analysts are expecting earnings of $3.24 for the company’s fiscal year 2020. This equates to a price-to-earnings ratio of 14.74, which is honestly fairly low within the conditions of the current market.
Therefore, if Cisco is sporting a $3.24 earnings projection, this equates to a payout ratio of 43%, which is getting a little bit on the higher side (for the company), but is still in that 40-60% sweet spot. 2019 marked the 8th straight year of dividend increases, and I can see the company easily crossing the double-digit mark into 2021.
I would like to see this position become a little bigger in my dividend portfolio… and there are only two ways to do that – buy more or reinvest the dividends for long enough!
Canadian Imperial Bank of Commerce (NYSE:CM)
Canadian Imperial is one of the largest 6 banks in Canada. I have owned it for years and currently have 109+ shares of CM. Bert has also been recently scooping up shares here and there of the big Canadian bank. When the stock market here is on fire and is constantly roaring/increasing, looking north for value is always a great way to find an undervalued stock. CM has declined in the last month. Further, it is below double-digit price growth on the year-to-date front, lagging the market. This could be poised for a great dividend stock investment opportunity, in case you are light on the banking sector.
CM has a current yield of 5.29%, based on the 12/27 close price of $82.74 and a currency-converted dividend of $4.38. What’s fun about the company’s dividend is that it grows its dividend two times per year, in February and August, typically. CM has been doing this for at least 9 straight years, and there have been the occasional 3 dividend increases in a single year. The dividend growth is somewhere in the 5.50-6.50% range, and with a current yield above 5%, that growth rate is fairly generous.
Eleven analysts are expecting $9.65 in earnings, and the dividend, after currency conversion, is approximately $4.38 per share. Therefore, CM has plenty of room to continue its two times per year dividend increase that us shareholders love. Why? The payout ratio is only 45%, which is right in the the 40-60% threshold.
Dividend Stock Watch List Conclusion
The best part about all 3 companies above is that they all are currently part of my dividend income portfolio. Prior to making any purchase, I definitely will make sure to run them through the Dividend Diplomat Stock Screener once more.
Out of all 3 dividend stocks above, Canadian Imperial may be first on my list, followed by Shell and Cisco. Always trying to stay consistent in my stock purchases, regardless of the market noise that’s occurring!
As you have noticed, I have trickled many articles on this page. The goal is to educate new dividend investors out there or to sharpen the terminology for current dividend investors. As always, stick to your investment strategy and dividend stocks will be there. What do you think of these stocks above? Thank you, good luck and happy investing, everyone!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.