I am well into my 12th year of investing and have a passion for investing in dividend paying companies. Although I also enjoy investing in quality non-dividend paying growth stocks, I make it a priority to allocate at least 70% of my portfolio to dividend payers. Investing in a diverse group of quality, dividend paying companies and reinvesting the dividends is a proven, long-term strategy that works.
1.) Diversify. Invest in at least 15 stocks in varying sectors in order to properly diversify. By spreading your investments into multiple sectors such as technology, healthcare, industrial and energy, you can minimize the pain in the event of some widespread hardships such as the ones that occurred during the recent financial and automobile bailout period. Additional methods of diversification include investing in companies of various sizes and risk levels, and including some international exposure.
2.) Research. Be very selective in the companies that you invest in. Develop a watch list of dividend stocks that you would like to consider investing in and learn as much as possible about these companies. Start with the companies that you know well. If you regularly use and love The Procter & Gamble Company (NYSE:PG)’s products, or think that The Coca-Cola Company (NYSE:KO)’s beverages are the best, then consider investing in these companies. P&G and Coca-Cola are a couple of my favorite dividend holdings and I recommend that you include them on your watch list. In order to help you to get started on your research, I am providing a brief analysis of PG, KO, and another favorite, Oceaneering International (NYSE:OII) as follows:
Procter & Gamble is a consumer products powerhouse that owns an impressive portfolio of brands that are sold in 180 countries. In fact, P&G has 25 brands with annual sales of over $1 billion that include Crest, Gillette, Olay, Charmin, and Tide. P&G’s extensive research has enabled them to continue developing innovative, high quality products. An important part of P&G’s growth has been making successful acquisitions such as Gillette, which enabled them to expand into the shaving and battery markets.
P&G has an impressive dividend history consisting of 57 years of consecutive annual dividend increases and an average annual dividend increase of 10.6% over the last decade. Their current dividend yield is 3% with a payout ratio (percentage of earnings used to fund the dividend) of 54%, which means that there is plenty of room for future dividend increases. P&G’s sales have increased from $43.4 billion in 2003 to $83.7 billion in 2012 and its net income has increased from $5.2 billion to $9.2 billion over this same period. P&G had a rough stretch during the great recession, partially due to some consumers being forced to purchase cheaper, lower quality products. However, the latest earnings report was very positive due to recent price increases, cost cutting efforts, new products, and a return of some of these consumers. Also, the full-year guidance was raised.
Whether the economy is booming or in a recession, people will continue to need products such as soap, toothpaste, shampoo, and toilet paper. P&G is a leader in all of these areas and as a result has stood the test of time. Although, PG is currently trading at its all time high, its improving financial results and outlook make it a stock to consider buying.
Coca-Cola is the world’s largest beverage company consisting of over 500 brands that are available in over 200 countries. Coca-Cola distributes many popular brands such as Diet Coke, Sprite, Power Aid and Minute Maid as well as many brands that you may not have heard of such as Kochakaden, a tea product distributed in Japan. Coca-Cola is determined to continue growing sales of its existing products and is focused on developing successful new products.
Coca-Cola has an impressive dividend history consisting of 48 years of consecutive annual dividend increases and an average dividend increase of 9.4% over the last decade. KO’s current dividend yield is 2.7% with a payout ratio of 51%, which means that there is plenty of room for future dividend increases. Coca-Cola’s sales have increased from $20.9 billion in 2003 to $48 billion in 2012 and earnings have increased from $4.3 billion to $9 billion over the same time period. KO hit an all time high of $43/share in 1998 followed by a drop to $20/share in 2004. Last year the share price rebounded to a multi-year high of over $40/share and has since dropped about 10% off of this level to $37/share.
KO is currently about 15% below its all time high, their brands are as strong as ever, and they are well positioned to continue their impressive dividend growth. For these reasons, I recommend that you consider opening an initial position in KO.
Oceaneering International provides a wide variety of services and products mainly for the offshore oil and gas industry, specializing in deepwater applications. OII is the worlds largest operator and provider of Remotely Operated Vehicles (ROVs), sometimes referred to as underwater robots. ROVs are used for many applications such as drilling, construction, maintenance, and inspections. The company’s additional products and services include cables, control systems, piping equipment, and diving services.
PG and KO’s dividend histories span decades but Oceaneering’s is just getting started. OII initialized its dividend in June 2011, and has since increased it twice with a 100% boost on the 2nd dividend payment and a 20% increase in 2012. OII’s current dividend yield is 1.1%, but I expect the dividend to be increased at a much larger rate than you typically expect with larger companies. The payout ratio is 27%, which means that there is plenty of room for future dividend increases. OII’s sales have increased from $639 million in 2003 to $2.6 billion in 2012 and its net income has increased from $29 million to an estimated $270 million over the the same period. OII’s share price has increased by a factor of ten over the last decade.
Offshore exploration and drilling are expected to increase significantly in the future along with the price of oil. Due to OII’s specialized products and services that are necessities in the offshore energy industry, the company should benefit significantly from this trend as will shareholders of the company. I recommend that you consider opening an initial position in Oceaneering International.
Resources. In order to find additional investment ideas, I recommend that you utilize the following resources:
- The Dow Jones Industrial Average – 30 of the most well known and successful companies in the US. Most of the components of the Dow are very impressive dividend payers.
- Dividend Aristocrats – A group of approximately 50 companies that are constituents of the S&P 500. In order to be a Dividend Aristocrat, a company must achieve the stringent requirement of increasing its dividend for at least 25 consecutive years.
- Dividend Achievers – A large group of companies with consecutive annual dividend increases of at least 10 years.
- The Motley Fool Income Investor newsletter – A newsletter service that includes recommendations that consist of a very selective and diverse group of dividend paying companies. This newsletter has consistently outperformed the market.
3.) Reinvest, Unless you are currently in need of utilizing your dividend income, it is vital that you re-invest your dividends. You can create an amazing compounding effect over time by investing in solid, dividend-paying companies and reinvesting the dividends. Dividend reinvestment can be accomplished by reinvesting each dividend received directly into the company that paid the dividend, or by allowing your dividend funds to accumulate over a period of time and investing them all at once. During periods when the stock market is down, dividend reinvestment can allow you to automatically purchase shares at bargain prices. Patient, successful, long term investors can eventually end up multiplying the number of shares owned many times over by dividend reinvestment, creating an impressive snowball effect.
4.) Manage. Effective portfolio management includes deciding what percentage of your portfolio to allocate to each sector, how many stocks you would like to include in each sector, the maximum percentage of your portfolio to devote to any one stock, and when to sell. My personal rules are to not exceed 20% of my total portfolio in any one sector and to not exceed 5% of my total porfolio in any one stock. However, each investor has a unique style and these percentages may vary greatly from investor to investor. Also, buy each stock incrementally instead of all at once. This will allow you to add to your position if the share price drops significantly provided that the original investment thesis remains valid.
I strongly recommend that you invest regularly over time, regardless of whether the market is up or down. Since I started investing in 2002, the Dow has been on a wild ride dropping quickly from 10,500 to below 7500, followed by a steady increase to all-time highs of over 14,000 in 2007, followed by the crash during the great recession to below 7000, followed by the recent run back near the all-time high reached in 2007. Throughout this volatile period I continued investing in the best dividend paying stocks on a monthly basis. This allowed me to purchase some of my favorite dividend stocks at bargain prices, especially when the market was at the bottom. However, if I would have gone all in by investing a large amount of money initially in 2002, I would have missed two of the greatest buying opportunities in decades.
5.) FUN. Investing in stocks requires some time to research stocks and manage your portfolio, but it is time well spent in my opinion. Watching your dividend paying stocks compound over the years is fun. I enjoy investing in dividend stocks and consider it a hobby as well as a vehicle to provide money for the future when me and my family will need it the most. Have fun and good luck!
The article Develop Your Own Successful Dividend Portfolio originally appeared on Fool.com and is written by Greg W.
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