• This guest post was written by Ben Reynolds, of Sure Dividend

    The Dividend Aristocrat Index has outperformed the overall stock market by 2.88 percentage points per year over the last decade.  A Dividend Aristocrat stock has paid increasing dividends for 25 or more consecutive years.  To accomplish this feat, a business must have stable, growing cash flows.  Dividend Aristocrats as a whole have made excellent buy and hold investments over the last several years.  Not all Dividend Aristocrats are created equally, however.

    Enter the PEG Ratio

    The PEG ratio was popularized by Peter Lynch, who averaged 29% returns over 13 years in his time with the Magellan Fund.  The PEG ratio compares how cheap or expensive a business is to its growth rate.  It is simply the P/E ratio divided by growth rate.  The lower the PEG ratio, the cheaper a business is taking into account its growth.

    Using last year’s earnings per share growth rate can be a bit misleading.  One-year growth rates can have wild swings that are not indicative of long-term growth.  Using the lesser of the 10 year revenue per share growth rate or 10 year dividend per share growth rate for each business produces results that are closely aligned with real business growth.

    Dividend Aristocrats & the PEG Ratio

    What happens when you combine the PEG ratio with Dividend Aristocrat stocks?  You find businesses with a long history of rewarding shareholders through increasing dividends trading at low prices compared to growth-adjusted value.  The top 5 Dividend Aristocrats with the lowest PEG ratios are:

    • Aflac (AFL):  1.14 PEG
    • Chubb (CB):  1.66 PEG
    • Family Dollar (FDO):  1.69
    • Wal-Mart (WMT):   1.90
    • T Rowe Price Group (TROW):  1.99

    Want the complete list?  This Spreadsheet sorts all Dividend Aristocrats by PEG ratio, with the cheapest businesses first.  The PEG ratio is an excellent way to generate long-term investment ideas, but there are other metrics to consider besides growth and value.  Sure Dividend uses the 5 Buy Rules from the 8 Rules of Dividend Investing to find high quality businesses with a long history of rewarding shareholders that are suitable for long-term holdings.

    Aflac Overview

    Aflac is the world’s leading cancer insurer.  The company sells cancer, health, and life insurance policies in Japan and the US.  About 75% of the company’s revenue comes from Japan.  Aflac has managed to write highly profitable health insurance policies over the last 5 years, maintain a pretax profit margin of around 20%.  The company has increased its dividends for 31 consecutive years, and is likely to continue to do so in the future.

    Chubb Overview

    Chubb Group sells home, car, business and supplemental health insurance through its network of independent brokers and agents. The company operates in North and South America, Australia, Europe and Asia. About 75% of the company’s revenue comes from the US, versus just 25% internationally.  The company has increased its dividends for 32 consecutive years.  Chubb has had a combined ratio (expenses & losses dividend by premiums) under 100% since 2003; the company has a long history of prudent, profitable underwriting.  Chubb is a Top 10 stock based on the 8 Rules of Dividend Investing.

    Family Dollar Overview

    Family Dollar is one of the US’ leading discount retailers.  The company has 8,100 locations in 46 states with over $10 billion in annual revenues.  Family Dollar is one of only four Dividend Aristocrats to have grown revenue per share at over 10% for the last decade.

    Walmart Overview

    Wal-Mart (WMT) is the world’s largest retailer. The company is focused on low prices resulting from operating efficiencies driven by economies of scale. Wal-Mart serves 245 million customers each week from over 11,000 locations in 27 countries.  The company has paid increasing dividends for over 4 decades.  Walmart is a Top 10 stock based on the 8 Rules of Dividend Investing.

    T Rowe Price Group Overview

    T Rowe Price is a global investment management business with over $700 billion in assets under management.  The company provides mutual funds and investment management, among other services, for individuals, institutions, and retirement plans.  The company has increased its dividends for 27 consecutive years.

    Summary

    Investing in high quality businesses at fair or better prices is an excellent way to compound your investments over time.  The PEG ratio combined with stocks with a long history of rewarding shareholders through dividends is a quick way to generate ideas for high quality dividend stock investing.

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  •  

     

    Each month on this blog, I publish my Best 2014 stock picks for both the US and Canadian markets. I always compare my picks to a dividend ETF. When I look at my own portfolio, I do the same thing. Finally, each month I publish my Dividend Stocks Portfolios at Dividend Stocks Rock and compare them to dividend ETFs as well. Some investors don’t do this because they feel good as long as they receive their dividends on a monthly basis and that their portfolio value doesn’t show a negative return. I use a comparison system because it enables me to see how good (or bad) I am.

     

    What is the point of comparing your returns?

     

    The point is quite simple: there are thousands of ways to invest your money and dozens of investment vehicles to package your portfolio. Let’s take my $50,000 invested in my RRSP for example. With this amount, I could invest in many ways:

    #1 I could go and see a broker that will manage the money for me

    #2 I could buy a good growth mutual fund and never look back

    #3 I could build an index portfolio with ETFs and rebalance it once a year

    #4 I could invest in a super safe GIC at 2.50% for 5 years

    #5 I could buy bonds with pretty much the same result

    #6 I could spend enough time on my investments to manage the portfolio myself

     

    The first 5 options won’t take much of my time. In fact, besides the ETF portfolio, chances are that you can spend less than 5 hours per year and have your money managed by someone else… and maybe you can spend about the same time if you build a coach potato ETF portfolio!

     

    Therefore, why in the hell would I want to spend hours managing my own stuff? There are two major reasons for this:

    #1 I love investing

    #2 I think I can do better than the market

     

    And this is the whole point of comparing: if I can’t beat the market, what’s the point of wasting time on my portfolio? I should just buy ETFs or simply buy a mutual fund and use my free time on something else!

     

    What do you use as comparison?

     

    I also take great pride to see that my portfolio did better than the market but I usually compare my return against a dividend ETF. The point is simple: I like dividend investing as it generates a better stability in my portfolio than other aggressive ways of investing. Comparing a 100% dividend stock portfolio to the market is a bit unfair as it will be killed during a bull market and usually perform better in a bear market.

     

    This is why I use a dividend ETF; because I could use the dividend ETF instead of spending time managing my portfolio. If I can beat the ETF, this means I’m better off spending time on for my stocks. I’m really passionate about investing but if I didn’t have the ability to make good decisions, I really wonder what would be the point of spending time analyzing stocks while I could simply buy a ETF and never look back, right?

     

    Do you compare your returns to an ETF or an Index?

     

    What about you? Do you use any kind of metrics to compare yourself? How do you know if you are doing well or not?

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  •  

    About 6 months ago, I wrote about how stock splits are more a marketing strategy than anything else. In fact, the real stock value doesn’t change and the individual investor who cares about buying a stock at $30 instead of $90 after a split 1:3 won’t affect much the market. After all, institutional traders (banks, insurance companies, financial firms and pension plans) are the real players in this market. How can you and I influence the stock market when one player can buy $10M worth of shares in a month?

     

    On the other hand, Eric from The Passive Income Earner, brought up a good point: stock splits make DRIPs easier for small investors. Since the stock price is smaller, it makes it easier to buy the next share.

     

    The most recent Apple (AAPL) split made me reconsider my dividend holdings. Not necessarily because I think the AAPL split makes the stock more interesting, but because reading about it gave me a trade idea. After all, stock splits are a great marketing strategy: I would have not read about Apple last week and I would have not thought of adding more shares to my portfolio…

     

    What Recently Happened With Apple (AAPL)

     

    At the end of April, Apple released its most recent earnings. If you had polled analysts before AAPL released its results, they were not very excited about it. There hasn’t been any new product launches and competition with Samsung and Google is still very tough. Nonetheless, AAPL surprised the market with EPS going from $10.18 to $11.62 this quarter. Sales were also up from $43.53B to $45.6B. Apple’s biggest earner is still the iPhone and it sold 6 million more units than Wall Street anticipated. Another stock buyback was announced ($60B to $90B), the dividend was increased by 8% and there will be a stock split to make the stock more affordable.

     

    The stock split occurred last week dividing the stock by 7. This means you can now buy AAPL for a little under $100 a share. I’m not considering adding more Apple to my portfolio because of the split but because this company seems to be back on a roll. They are still sitting on a pile of cash, growth seems to be picking up again and a new range of products is on the verge of happening. If Microsoft was able to surf on Windows for decades, why Apple couldn’t do it with its perfect product ecosystem? (going from phones to mp3 players with tablets, computers and going after TVs).

     

    But first, I need to find money to invest in Apple…

     

    What is Going on with Chevron (CVX)

     

    Thanks to my new investing tool; Dividend Stocks Rock, I follow about 45 companies closely. Newsfeed and financial statements are on my desk each morning to pick up the most recent facts about all these companies. While doing my review for the last earnings season, I noticed a few things about companies I own that bugged me…

     

    Chevron’s recent quarter wasn’t a fairy tale. Profits fell 27% as all core business segments struggled. 95% of CVX profits come from its Exploration and Production segment and this part of the business dipped 27% as well. The stock didn’t hit the bottom of the graph price because investors keep hoping on major projects that are about to go into production. The recent 7% dividend increase should be enough to keep investors waiting a little bit longer.

     

    While CVX has always been a good dividend payer, it seems almost unfair to me to compare the growth potential of both CVX and AAPL. I know they are very different from each other in terms of sector and business models, but as an investor, I’m looking after the best possible trade; period. This is why I intend to sell CVX and buy more AAPL.

     

    Rebalancing my JNJ Holdings

     

    If I sell all my shares and go all-in in Apple, I would show about 14% concentrated in one stock. That’s a little bit too much. At the other end of my portfolio, my smallest position is JNJ. And Johnson & Johnson is rocking the market right now…

     

    JNJ is up 9% this year and had nothing but good news for investors when posting its first quarterly results. Prescription drugs increase, profit jumps and a 2014 outlook increase as well. JNJ published a sales increase of 3.5% and a profit jump of 8%. Both results were beyond analysts’ expectations. JNJ sales were led by international sales (+10.8%). JNJ is also working on a new diabetes drug which could push the stock to higher levels.

     

    So, in the upcoming week I will:

     

    #1 Sell CVX

    #2 Buy more AAPL

    #3 Buy more JNJ

     

    What do you think of these trades? Are you still confident in CVX?

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