Financial dividend stocks – my next purchase in June

I’m looking at dividend stocks in the Financials sector to decide what to buy next week. This sector has the lowest weight in my dividend stock Portfolio. I own two Financial dividend stocks, so I’ve picked some other stocks from the Dividends Champion List that caught my eye to see how they compare and if starting a new position to diversify is worthwhile.

Here’s my portfolio as of 20-June grouped by market sector. Financials is the lowest sector this week having performed worse than Basic Materials from the same time last week.

Financial dividend stocks are the lowest in value in my portfolio as of 20-June. Here's my portfolio grouped by sectors showing Financials in last place, with Basic Materials and Consumer Defensive not far behind.
My portfolio as of 20-June grouped by sectors showing Financials in last place, with Basic Materials and Consumer Defensive not far behind.

My financial dividend stocks

I currently have positions in JPM and AXP in the Financials sector.

JPMorgan Chase (JPM) is a $211B bank and financial services company. Notable for its colorful CEO, it looks to have its legal troubles under control after a $13B settlement last year. The company has increased its dividend since 2010 when it cut them. Its payout ratio is 37% with a current dividend yield of 2.78%. Its P/E of 14.2 is lower than the industry average of 16 and the S&P 500 average of 18.3. The last 5 years’ annualized dividend growth from 2009 to 2014 is about 24%. S&P Capital’s 12 month target price is $66; around 16% higher than today’s price.

American Express (AXP) shouldn’t need any introduction being one of the world’s major credit card companies, although less accepted in Europe than Visa / MasterCard. It’s a $101B company and has a higher valuation at present of 18.6 vs. the industry average of 17.4 and the S&P of 18.3. Since 2007, its P/E has been lower than the S&P except for 2010 when it was significantly higher. The company’s current dividend yield of 1.09% has increased for the last 3 years and is backed by a low payout ratio of 19%. Over the previous 5 years the dividend growth was about 5%. S&P Capital’s 12 month target price is $100; around 5% higher than today’s price.

Choosing new stocks to consider

My initial screening of the Dividends Champion List is as follows:

  • Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in
  • Exclude any stock which has had negative growth in the last 5 years
  • Exclude any stock which is projected to have negative growth in the next 5 years
  • Include only stocks with a dividend yield above 2%
  • Exclude the Banking industry as I want to diversify within the sector

There were 25 companies meeting the above criteria, all of them having had paid dividends for 5 years or more. I’ve chosen four of them below. Narrowly missing the list was CINF which I rejected based on its low dividend growth.

The new contenders shortlist

I don’t own any of the following four companies; I included them to see how they compare to what I own and if they might be worthwhile purchases.

T. Rowe Price Group (TROW) is one of the largest publically held mutual fund companies with a $21B market cap. The company offers a wide range of low cost mutual funds as well as managing investment accounts. It has increased its dividend each year over the last 27 years. The company has a P/E of 20. which is a little higher than the Industry average of 19.4 and higher than the S&P’s 18.3. Historically since 2004, the TROW’s P/E has always been higher than the S&P’s, although the gap has been closing of late. The current dividend yield is 2.11% with a payout ratio of 38.4%. TROW’s dividend growth over the last 5 years has been about 12%. S&P Capital’s 12 month target price is $92 or 11% higher than today’s price.

Chubb Corp (CB) is a $22B holding company which manages property and casualty insurance. It’s a dividend champion, having increased dividends for each of the last 48 years. The company has a P/E of 11.2 which compares well with the industry average of 12.4 and the S&P’s 18.3. In fact the P/E has been significantly lower than the S&P’s value since 2004. The current dividend yield is 2.14% with a solid 21.8% payout ratio. The dividend growth over the last 5 years has been about 7%. S&P Capital’s 12 month target price is $95 or 2% higher than today’s price.

AFLAC Inc (AFL) shouldn’t need any intro-duck-tion  – I’m sorry, I couldn’t resist! Its a $28B insurance company offering live and supplemental health insurance in the US and Japan. Its dividend yield is 2.35% with a payout ratio of 23.7% and it has increased its dividend each year for the last 31 years. Its P/E of 9.8 is considerably lower than the industry and S&P averages of 15.6 and 18.3 respectively, although AFL’s P/E has been lower than the S&P’s P/E for nearly every year since 2004 (except for 2007 & 2008). AFL’s dividend growth over the last 5 years has been about 5%. S&P Capital’s 12 month target price is $70 or 11% higher than today’s price.

Old Republic International Corporation (ORI) is a $4.4B insurance underwriter. It’s another long term dividend champion having increased its dividend each year for the last 32 years. Its dividend yield is 4.29% with a payout ratio of 69%. The P/E ratio of 8.6 is well below the industry average of 14.5 and the S&P’s 18.3. ORI’s dividend growth over the last 5 years has been about 1.5%.

What to buy?

Looking at all 6 choices, my criteria of requiring a 5 year dividend growth history eliminates both my current holdings in AXP and JPM from the start. AXP froze dividends from 2009 through 2012 and JPM lowered dividends in 2010 but has been increasing them ever since.

The remaining 4 companies have suitable dividend yield, however my criteria requiring a 3% dividend growth rate eliminates ORI, leaving CB, TROW and AFL.

All remaining three stocks look reasonably valued, although I don’t necessarily view higher valuations as a bad thing. And all three stocks offer around the same dividend yield between 2 to 2.4%. Based on their dividend yield and history, TROW beats CB which beats AFL. AFL also loses points for not having a consistently regular dividend increase pattern over the last 5 years; it didn’t increase dividends in 2009 and increased them out of its regular pattern in 2010.

Putting it all together, I’ve decided to purchase TROW over CB and AFL. While CB had a longer dividend growth history, TROW’s higher projected dividend growth put it slightly ahead, I do a simple comparison of how much an investment would provide over 5 years’ time based on the stocks current dividend yield and estimated future dividend growth and TROW was higher.

Here’s the outcome visually.

Yield #Yr DivGr5 Est Value Stable Status
JPM 2.7 4 24.1 78 0 Hold
ORI 4.3 32 1.5 46 0 Hold
TROW 2.1 27 12 37 5 Buy
AFL 2.4 31 5.7 31 4 Buy
CB 2.1 48 7.4 30 5 Buy
AXP 1.0 3 5 12 0 Hold

I think TROW has good growth potential – it should attract a fair share of investments from the retiring baby boomer population and as the US economy improves there should be more money available to go back into the stock market, all of which help TROW’s funds.

My purchases this week

So total purchases this week will be:

  • $360 Individual Stocks (TROW)

This purchase should increase my yearly dividend income by about $7.

Full disclosure: I am long JPM & AXP.

 

Quote of the day

Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.

0 thoughts on “Financial dividend stocks – my next purchase in June”

  1. All good choices and an interesting way to weed out certain stocks. For me, I have been looking at the financial space this month too with my eyes on AFL, CB and WFC. I’ll be posting my selections next week. Thanks for sharing!

    1. Hi DivHut,

      I’m looking forward to reading about your selection. I started my analysis with an eye on AFL and CB as I have no insurance stocks currently. They’re certainly good choices and it was a close call. I’m interested in WFC too because my mortgage is with them but I already have JPM and wanted to diversify more since neither banks were able to keep paying dividends consistently.

      Thanks for stopping by!

        1. Hi DivHut,

          Thanks – I just popped over to your blog to check it out. Looks like some good purchases there 🙂

          I like Sharebuilder too for the cheaper fees and fractional shares, although I am looking to see how I might get free trades at other brokerages – the requirements at Merrill Edge are quite high.

          Thanks for following up!

  2. Nice compilation of stocks. I don’t have much exposure to the financial sector. Looking at WFC for a while. Also, looking at the insurance sector too. AFL is one stock that is popular among lot of dividend investors. But TROW looks great too based on your analysis. Need to look into these stocks in more detail.

    1. Hi DGJourney,

      I came across this article today estimating both WFC and AFL as undervalued so I’ll be looking forward to learn from your analysis when you post it. I think they’re all well-run companies.

      Thanks for commenting!

    1. Hi Living At Home,

      Yes I agree, and the oft-used phrase ‘never let a crisis go to waste’ seems quite appropriate for investing in finance stocks as one seems to occur every few years.

      Thanks for commenting!

  3. DL,

    Thanks for the info. I was looking at JPM and TRV earlier this year and just never pulled the trigger. I will take another look at some financial stocks soon as I have none in my portfolio right now.

    MDP

      1. Thanks for that! I like it also, a nice compact view of the best ones! I also like my new stock selector. It’s a nice toy to play around and helpful when selecting stocks !

  4. Nice article Dividend life! I have a position with AFL and have mulled over another capital infusion into them. You may even see an article from us later this week on them. Great analysis and ultimately – a decision was made! I like it. Congrats on the purchase and investing!

    -Lanny, one of the diplomats

    1. Hi Lanny,

      Thank you for stopping by and lending your support; I appreciate it. Yes I’m definitely interested in AFL too and I look forward to reading your analysis!

      Congrats on your own FI journey – from reading your blog you’re both off to a great start!

      Enjoy the day!

  5. Hello dividendlife,

    What figures have you used as estimated future dividend growth for those companies?
    Have you calculated them based on past dividend growth and future estimated growth?

    Thanks!

    1. Hi Joan,

      For future growth I use the company’s 5 year estimated EPS growth from finviz.com where it’s shown as “EPS Next 5Y”. This value is also used in David Fish’s dividend champion list (column AE) – I just make sure I have the latest value from the website.

      I then take the average of the previous 5 year dividend growth and the next 5 year earnings growth and use that percentage to increase the current dividend yield 5 years into the future. This result forms the basis of the ‘Est Value’ column which I use to compare the relative performance between companies.

      Thanks for stopping by!
      Best wishes,
      -DL

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