13 Companies to build a Dividend Growth Portfolio with 10 years to go

In my latest article, I’ve discussed the metrics I would use to make a selection of dividend paying companies if I had only 10 years to build my portfolio. The idea of using a shorter time horizon was to show how limited you could be if you only select companies that are currently paying an interesting dividend now. When I wrote my first article about metrics to be used, I didn’t pull the stock filter yet. I just did in order to write this post. I’m not surprised, but the choice is very limited even considering a set of wide and generous metrics.

Choosing among companies with growth revenues and EPS that pays dividend over 3% and that still show payout ratios making sense seems to be a tough mission at the moment. There are lots of ADR’s that make it harder to evaluate. I tried to clean some of them (I mostly taken off Chinese companies) and the list shows a little bit over 100 companies including both U.S. and Canadian market. Due to the current market, we see several financial institutions. You can download the excel file here:

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You will notice that there isn’t much choice. Still, I was able to pull out an interesting portfolio by combining both Canadian and U.S. stocks. I’ve built the following portfolio based on my 7 investing principles.

 

4 Canadian Companies

I would start building this portfolio with 3 Canadian Banks. In fact, several financial Canadian companies could have been included to build this strong portfolio. Unfortunately, picking all of them would lead you to a heavily concentrated portfolio in one sector, which is never good. For this reason, I’ve selected Royal Bank (RY.TO), TD Bank (TD.TO) and ScotiaBank (BNS.TO). The last Canadian companies I have selected is Rogers Communications (RCI.B.TO) as it also performs in an oligopoly.

Royal Banks (RY.TO) 4.08% Dividend Yield

Royal Bank provides various financial services to individuals as well as commercial and institutional clients. Their services range from regular banking, investments, insurance, brokerage, mortgages, loans, etc. RY recently purchased City National, a private & commercial bank for wealthy clients based in Los Angeles.

I consider RY as very interesting play as its capital market and wealth management sectors provide a strong and consistent revenue stream aside from traditional banking. They do an awesome job generating strong profits from capital markets and their wealth management division generates revenues from over 15 million clients. Their recent purchase in LA is already increasing RY total revenue as per their latest report.

TD Bank (TD.TO) 3.76% Dividend Yield

On top of being a leader in Canada, TD is also the most productive Canadian Bank (e.g., more earnings relative to its risk-weighted assets). Its earnings volatility is lower than its peers due to less exposure to capital markets. Finally, TD has deployed a very lean structure into its branches which benefit greatly from their expansion in Quebec and the US. TD Bank is now known as “America’s Most Convenient Bank.” TD has recently beat analysts’ estimates once again. Their lean structure gives them one of the best customer service scores across Canada.

I’ve picked TD for its great presence in the US as compared to other Canadian banks. This is a market that will continue to grow and compensate for a slow Canadian economy growth. While Royal Bank and National Bank are performing on the capital market, TD has opted for stability with a more classic banking model. For a dividend investor; this means a stable business model providing predictable dividend increase. Two things we like! Finally, TD is successfully gaining market share in Quebec, a long time ignored market from the big 5.

ScotiaBank (BNS.TO) 4.19% Dividend Yield

ScotiaBank, is the third-largest bank in Canada in terms of asset base. It provides various financial services to individuals as well as commercial and institutional clients. Their services range from regular banking, investments, insurance, brokerage, mortgages, loans, etc. BNS is the most “international” Canadian bank serving a total of 21 million clients spread across 55 countries.

BNS is also highly invested in commodities, which hasn’t been a plus in 2015 but has been a good thing for 2016. The stock is up by 26% since the beginning of the year as the oil market is recuperating. sIts total loan exposure in the oil & gas industry is up to $15.5 billion (source Scotiabank investor presentation). Now that the situation of the barrel of oil has stabilized, we will see which companies may default on their loans in this new environment.

Rogers Communications (RCI.B) 3.45% Dividend Yield

Rogers (RCI.B) is a diversified communications and media company. The company is divided into three divisions: wireless, cable and media. While the Rogers business is similar to Telus when we compare wireless and cable services, RCI.B has an extra division called media. Rogers broadcasting has increased, notably through the acquisition of the Toronto Maple Leafs and the ownership of the Blue Jays that will certainly feed Rogers Sportsnet.

Rogers is well established in various markets and it has recently made another interesting play: they secured the rights to NHL broadcasting exclusivity for 10 years. The deal by itself should not add huge profits to the table but if RCI is able to leverage its broadcasting to promote their other brands (such as mobile services), this contract will be worth every penny.

 

9 U.S. Companies

The U.S. stock market shows some interesting pick as well. I think we can build a solid portfolio paying over 3.50% dividend yield at the very beginning through this list. Once again, those selections have been made based on my 7 Investing Principles.

Cal-Maine (CALM) 5.57% Dividend Yield

Cal-Maine Foods is a leading producer and supplier of consistently, high quality fresh eggs and egg products in the United States. The company, founded in 1957, is known for growing rapidly through acquisitions. Since 1989, the company has successfully acquired 18 existing egg production and processing facilities. It is a fully integrated egg producer. Cal-Maine sells 90% of its eggs to retail buyers such as Wal-Mart, Costco, Food Lion, etc.

It issues special dividends according to their revenues and profits. Don’t be shocked when you check their dividend payout trends, it goes up and down, but always pays a strong dividend for the year.

Cummins (CMI) 3.13% Dividend Yield

CMI has been more than generous with its shareholders over the past 5 years. In fact, the company shows a dividend growth rate of 32.03% CAGR. The company will not be able to maintain such a strong trend, but it is definitely in a good position to keep increasing its payment year after year considering both payout and cash payout ratios around 50%.

An investment in CMI is based on its ability to protect its know-how in designing more eco-friendly engines. New markets are slowly but surely opening up to Cummins due to this specific expertise. Europe in the upcoming years and later China & India will also improve their environmental rules with regards to emissions. They will then open the doors to company such as Cummins to benefit from their expertise. CMI has already created partnerships with important clients such as TATA in India. It is very difficult for its competitors to catch up on 10 years of massive R&D investments to develop such technology. This is how Cummins should keep its competitive advantage for a while.

Emerson Electric (EMR) 3.59% Dividend Yield

Emerson Electric is part of the 18 Dividend Kings. EMR specialises in high tech products and services for its customers. The company shows two divisions which are commercial & residential solutions and automation solutions. Automation solutions is the biggest segment with roughly 2/3 of the company sales in 2015. Its most recent growth vector has been found in China and India as they participate in building important cold-chain infrastructure to keep food fresh. Both countries lose billions due to wasted food. EMR’s performance is also highly linked to providing techno solutions to the oil & gas industry.

EMR could show stronger numbers a few years from now once the oil industry is back on its feet. In the meantime, climate control technology should be EMR’s focus to bring additional growth within its business model.

Eaton (ETN) 3.35% Dividend Yield

Eaton is part of the elite group of dividend aristocrats due to its 32 consecutive years of dividend increase. Still I have the feeling we don’t see this name often in the financial news. On top of this, Eaton is working in the trendy environment of “energy efficient solutions”. The company offers solutions to help customers manage electrical, hydraulic and mechanical power in an efficient way. The company works in two different sectors, each split into the following segments:

The Electric sector:

• Products (32% of total sales)
• Systems & Services (29% of total sales)
• The industrial sector:
• Hydraulics (13% of sales)
• Aerospace (8% of sales)
• Vehicle (18% of sales)

The company currently sits on a solid business model, but evolves in a cyclical environment. Patient investors will see a great opportunity to invest in a solid dividend growth stock while enjoying a 3%+ dividend yield.

GAP (GPS) 3.85% Dividend Yield

GAP owns several well known brand in the clothing across the world. Among their portfolio brand, they have Gap, Banana Republic, Old Navy, Athleta and Intermix. Their business model is based on strong brand recognition and corporate operated stores. GAP has found ways to connect with their clients through mobile phone app and internet.

The company is carefully selecting their store location in order to insure the success of each store.

Maiden Holdings (MHLD) 4.02%

Maiden Holdings Ltd (MHLD) is organized to provide, through an insurance subsidiary, property and casualty insurance and reinsurance business solutions mainly to small insurance companies and program underwriting agents in the United States and Europe. The company is based in Bermuda.

MHLD is evolving in a relatively stable and predictable market. The company focuses on building strong partnerships with insurance companies that constantly require MHLD services to pursue their business. This is an unusual holding in a conservative portfolio, but it’s dividend growth perspective has made MHLD a very good pick for the past couple of years.

Qualcomm (QCOM) 3.19%

Qualcomm Inc develops digital communication technology called CDMA (Code Division Multiple Access), & owns intellectual property applicable to products that implement any version of CDMA including patents, patent applications & trade secrets. The company derives most of its income from the smartphone business selling chips for power and network connectivity. Essentially, phones are unable to connect to 3G networks without paying a royalty (about 3%-5% of the price of the handset) to the company.

Its leadership position in the 4G LTE chipset arena and strong relationships with major smartphone makers establish solid bases for an ever increasing cash flow. However, nothing is perfect in the mobile industry. QCOM is facing serious collection problems in China and it is currently losing market share among the biggest smartphone players such as Samsung and Apple. There are also regulation issues pointing ahead where some countries (like South Korea) are determining that the royalty should not be paid based on the smartphone full price.

For these reasons, QCOM’s stock price has seriously declined over the past 12 months. However, you may not want to ignore the fact that QCOM technology will become even more important in the future. Since all devices are getting connected (they call this the “internet of things”), the usage of smartphones (and the networks they require) will become even more important in the future. It’s definitely a company to have a look at!

Target (TGT) 3.22% Dividend Yield

It is hard to find a consumer stock paying over 3% right now. However, Target seems to fit well for our portfolio. Target Corp is engaged in operating general merchandise discount stores in the United States. Target benefits from a strong brand, great location and several signature products. The company emphasis more on retail products than food (compared to Wal-Mart, Costco, etc).

The fact that Target is leaving food aside to concentrate on retail products makes it a differentiation factor for them. Instead, TGT focuses in the superior in-store experience compare to its competitors. For this reason, Target generates higher margins than Wal-Mart, Costco and Kroger.

Verizon (VZ) 4.27% Dividend Yield

Verizon is the leader in the wireless industry in the USA with a 34% market share (followed by T with 30%). I believe its reputation, based on quality, TV protects VZ from many competitors over the long haul. The company understands its clients, who would rather pay a premium for a phone that will work everywhere than a cheaper package with occasional problems.

I also like the fact the company is evolving in an oligopoly. While growth perspectives are not incredible within the wireless segment, Verizon has other alternatives to explore with the purchase of AOL in 2015. If it can unlock the value of AOL’s internet advertising platform by merging it to its wireless services, we could be back to higher dividend increases for a while.

Verizon is more a conservative stock that will generate a solid cash flow. At the moment, it could also easily fit into a growth portfolio if you are one of the believers in the AOL acquisition. This could be definitely be a game changer for Verizon. Higher risk, higher reward.

 

Final Portfolio 3.82% Dividend Yield

Overall, I think this portfolio shows enough diversification while offering a good dividend yield. In 10 years I think it is safe to say that this portfolio will generate somewhere around 6% base on the cost of purchase. This is definitely a great start for someone who doesn’t have 30 years in front of them to build their portfolio. What do you think?

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