There have been a lot of major news stories over the last week covering topics ranging from social to financial issues. It seems like every day there was some new development that had major implication, which is a great fit for our 24 hour news cycles. The one story that has a substantial impact on us dividend growth investors is the continuing saga in Greece. Once again, we find ourselves staring a default, departure from the European Union, etc., in the face and worst of all at any second a decision could be made that could send shock waves through the financial markets. It finally hit me, I didn’t have a plan to capitalize on a potential downturn in the market. But that all changes now.
My Plan & Rationale
First of all, we must remember that I am a buy and hold investor of dividend growth companies. So I want to squash the sell option right here, because a pullback in the market is not one of the reasons I would consider selling a stock. If anything, a pullback is a great opportunity because it allows me to 1. Purchase undervalued dividend stocks that fit my stock screener and 2. Re-invest dividends at a lower price so I can receive more shares (albeit, the increase typically results in a tenth of a share more). So in my eyes, a downturn in the market just presents one giant buying opportunity.
That’s what I find unique and fascinating about what is currently going on in Greece. I can’t imagine what it must be like to be in the middle of the situation as it has to be stressful for all parties involved. There is just so much on the line for everyone and it is hard to find a scenario where everyone can win. And when a major country could potentially default on their debt payments at any moment and the news regarding the default is constantly changing, the markets are rightfully volatile. Although, I must say this time around the markets seem much more calm than in the past. As I mentioned before, I want to craft a plan for how to capitalize on a sudden downturn in the market that would result from sudden bad news. The last thing I want is to see the market drop over 2-3% within an hour and have to commit time trying find the best investment. Since time is precious, I thought developing a list of a few companies would be a constructive exercise.
When developing my list, I didn’t want to just put together a watch list of all companies. Heck, we do that all the time. No, for this I wanted to develop a specific list of stocks that will allow me to best capitalize on this unique situation. It’s not just enough to aim for stocks that meet our stock screener and are potentially undervalued. Since the European Union and companies that conduct business in the EU will be the most impacted by a negative development in the Greece situation, I am looking for dividend paying companies that conduct business predominately in the Americas or Asia. What I am trying to take advantage of are companies that have been dragged down by the broader market even though their future cash flows, which drive their dividend, will not be impacted since their consumer base is not located in Europe. To me, that is how an individual investor can truly capitalize on the a sudden shock in the market place driven by a negative development from Greece.
Watch List
Now that I have identified that I am looking for dividend growth companies that are not European centric, it is time to list some stocks that are now on my watch list. This list is not all-inclusive and I am sure there are many other great dividend growth stocks out there. Please, if there is a great stock I am missing, please make sure to let us know in he comments section.
1). Altria Group (MO) – I already own the international spin-off of the old company and added to my stake a few months ago, so why not add shares in the domestic portion as well? MO is one of those rock solid dividend companies in an industry notorious for dividends. MO’s current PE ratio is ~19, a dividend yield of 4.2%, and a 3-year average dividend growth rate of just over 4%. While the payout ratio is high, I am not overly concerned since a high payout ratio is common in the tobacco industry.
2). Consolidated Edison (ED) – There are some great utility stocks out there, and I own three of the largest electric utility companies right now. Kind of funny when you think about it even though I may potentially sell my stake in First Energy for a variety of reasons. Out of the three I own, I would love to take the opportunity to add to my position Consolidated Edison, which I added to my portfolio last month. While the dividend growth rate has been less than stellar, I love the longevity of the dividend increases, the solid dividend yield, and the companies current valuation compared to others in the industry. Wouldn’t mind adding some extra shares for this foundation stock!
3). Kinder Morgan (KMI) – Lanny and I already have nice stakes in Kinder Morgan, but man would I love to own more. This is just a great dividend paying company. KMI has the largest market cap in the oil and gas pipeline industry, by far, and has an insane network in North America. Even better, as a part of the consolidation that cause the jump in the share price last year, management has committed to increasing their dividend 10% annually through 2020. A pullback in the market and KMI may provide too great of an opportunity to pass up here.
4). Norfolk Southern Corporation (NSC) – The rationale behind purchasing NSC is similar to KMI. NSC is one of the large railroad companies in the United States with a large network of railroads that have allowed the company to establish one heck of an economic moat. I recently initiated a position in NSC a few months ago based on the stock analysis Lanny performed, which showed a sub 40% payout ratio, a 3-year average dividend growth rate of 10%, and a current PE ratio below the S&P 500. Since my last purchase, the price has only decreased, so why not re-up my position if the stock continues to slide.
5). Realty Income (O) – Last but not least, I wanted to add a stock that I have been watching for quite some time, Realty Income. This stock is a darling in the dividend investing community, as their monthly dividend increase that increase nearly every other month really accelerates the power of dividend re-investing. The company is well diversified through the United States, owning property in 49 states and Puerto Rico. On top of it, the company diversities their tenants to avoid over exposure to one industry, which can cause headaches for some REITs. With a yield over 5%, initiating a position in O would add a nice punch to my dividend income, which has to cross $2,750 at some point before 12/31/15 so I can achieve my goal!
Summary
Again, I would like to emphasize, this list is not all-inclusive and there are many of other great dividend paying companies out there, whether they are domestically focused or not. However, based on the current environment, the five stocks listed above would allow me to potentially capitalize in a sudden pullback in the market. Honestly, I would be happy to purchase any of the five stocks listed above. While my strategy may not be perfect and we may disagree, I am happy that I took the time to formulate a strategy that will allow me to act fast if needed. Hopefully, for everyone’s and most importantly the citizens of Greece’s sake, the situation will be resolved and I can toss this plan and watch list out the window. If not, at least I have a plan and I am ready to pounce.
What are your thoughts about the plan? Are there any other stocks you think I should consider? Am I too narrowly focused by only considering stocks that operate outside of Europe? Would you consider any company in a market pullback as a result of negative news in Greece? Please everyone share your thoughts, I am looking forward to hearing what you have to say!
-Bert
Hi Bert,
As a European, I really hope that Greece doesn’t buy the farm, economically speaking, because I am sure that there are going to be a lot of issues that will arise from a possible default. Most of them are linked to the exchange rates, not so much about Greece itself that has as many inhabitants as a metropolis (11 millions). What will happen to American companies when the dollar gains strength on a probable (recent news speak for themselves) drop of the Euro? Out of your list I believe that Altria will probably loose some profit, out of a strong dollar, the others seem to be well covered against any European crisis as the main markets are US only.
Having said that, people keep repeating that “nobody knows what will happen” because it has never happened before a similar situation… I still hope that they manage to sort it out 🙂
As to me, I am staying liquid. I.E.: I had some savings to invest but I am not going to put them in until things are clearer…
Ciao ciao
Stalflare
Stalflare,
Thank you for the insight on the exchange rate. That was an aspect of this that I didn’t really consider when I was putting together the list, but it could have a major impact on many companies (even if they don’t operate in Europe). But I am with you, I really hope they do not default and the situation would get ugly fast. Those type of events are not handled particularly well in the market and the knee-jerk reaction will be strong. You would think that they are putting some of the smartest guys in the room together to arrive at the best solution here that will cause the least damage, but once politics enters the equation sometimes the best/most logical solution becomes the victim of pointless politicking and personal grudges.
For you as a European, I can’t blame you for staying liquid with all the uncertainty. Have you considered purchasing some of the massive blue-chip companies if there is a big downfall, such as UL, since they have weathered other storms like this before? Things are a little different over the pond here, so our situations are not the same. All I know is I wish I had a heck of a lot more money in 2008-2009 during the financial crisis so I could take advantage of and pick up some severely discounted stocks.
Thanks for stopping by!
Bert
The european markets as a whole is cheaper than the american. Economic data for the eurozone are on the uptrend. Greece is a very small part of that economy and safeguards for any eventuality is in place. If the european stocks head lower it will be due to uncertainty and fear, not fundamentals. In short, it’s buying time and I’m targeting those stocks that get pulled down most. Kind of the opposite of your strategy.
I agree, there are definitely more discounts abroad than in the US, I should probably have done a better job over the last year taking advantage of some of the discounts before the economy started to improve. I know Greece is only a small part of the economy, but if the banks shut down, the country defaults, or anything else major happens then there will be shockwaves sent throughout the EU that will take an axe to the rally.
I don’t think our strategies are that different though. We are both looking to capitalize on the a short-term pullback in stocks, we are just looking at different areas. Your strategy is great as well, as there will be some great blue-chip stocks that will be traded at a discount. You are just focusing on European stocks and I am focusing on US stocks that are dragged down by this. Same thought, different target market. Regardless, we will both add some great stocks to our portfolio!
Thanks for stopping by. Make you you let us know what you end up doing in the market!
Bert
Greece is a very messy situation indeed. Who knows how any of this will pan out.
I agree with Stalflare. I am currently retaining a degree of liquidity until there is a bit more certainty as to what is going on. As I am mostly invested in the UK market, my portfolio has been hit more than the US it seems but not half as much as the European market more generally.
We will have to wait and see.
Utility stocks certainly seem appealing in this environment. Even in tumultuous times they should keep a fairly solid earnings profile. This is especially true of the mostly US-focused ones you mention above.
Good luck with your decision. Let’s hope that whatever decision is made here in Europe will be the best one for the Greek people. It is not clear that any of the options are particularly great for them.
Sure a shaky market can result in buying opportunities. That’s probably the only good way to see things as a dividend investor. During times many stocks seem overvalued, it is one more good reason to look for some drops in price. However, stable companies seem to be the real key to more profits. Hopefully, drop in price won’t mean less quality as well.
The investor now letting the man speak, I wish for the people out there to be safe and be done with these though years soon.
Cheers!
Mike
The recent turmoil just provides more buying opportunities for us long term investors. Great list of stocks that you shares, definitely need to include them on my watchlist.
Curious, any idea why the KMI payout ratio looks so high? over 250%!
Is there something I’m missing?