Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

Dividend stocks are great but dividend stocks with rising earnings and low valuations are even better

By Baskin Financial Blog Stock MarketsFeb 27, 2012 10:37AM ET
www.investing.com/analysis/dividend-stocks-are-great-but-dividend-stocks-with-rising-earnings-and-low-valuations-are-even-better-115179
Dividend stocks are great but dividend stocks with rising earnings and low valuations are even better
By Baskin Financial Blog   |  Feb 27, 2012 10:37AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
by Barry Schwartz

We’re all fans of dividends now.  Record low interest rates are here to stay and as a result, many investors have jumped on the dividend bandwagon.  I don’t blame them, companies that have predictable revenue streams, great balance sheets and a history of rising dividend payments should be the cornerstone of any portfolio.  But many of these names are clearly overvalued.  North American REIT’s, pipelines, utilities, consumer discretionary stocks and even some telcos  are trading at record valuations and well above the overall market P/E ratio.  Investors should use caution buying stocks in these sectors.  Sure you’ll get the dividend but you could be in for a capital loss if the market starts to reward riskier companies.

Instead of chasing yield, it’s time to look for growth at a cheap price.  We think the winning formula is to buy companies with a dividend yield of at least 1.5%, a P/E ratio of 12 times this year’s earnings expectations or less, forward earnings growth of at least 10% for 2012 and a track record of raising dividends over time.

Three names that fit this bill are Teva Pharmaceutical, Home Capital Group and CSX Corporation.

Teva manufactures both generic and branded drugs.  It earned $4.97 a share in 2011 and is expected to earn $5.59 a share for 2012, suggesting 12% growth.  With the release of its fourth quarter results, Teva raised its dividend 25% and now has a current yield of 2.4%.  Teva has raised its dividend 13 years in a row. At its current price of $44.70, Teva is trading at 8 times its 2012 earnings per share estimate.

Home Capital is a mortgage lender and financial services company.  It earned $5.53 a share in 2011 and is expected to earn $6.42 a share in 2012, suggesting 16% growth.  Home Capital has raised its dividend 16 times over the last 8 years.  Its current yield is 1.6%.  At its recent price of $49.61, Home is trading at 7.7 times its 2012 earnings per share estimate.

CSX is a Class One railway operating in North America.  It earned $1.67 a share in 2011 and is expected to earn $1.87 a share in 2012, suggesting 12% growth.  CSX has raised its dividend seven years in a row and has a current yield of 2.2%.  Currently trading at $21.79, CSX is valued at 11.6 times its 2012 earnings per share estimate.

Disclosure: The author and/or his family members own shares in Home Capital Group and Teva Pharmaceuticals.  Clients of Baskin Financial own shares in all three companies  mentioned above.
Dividend stocks are great but dividend stocks with rising earnings and low valuations are even better
 

Related Articles

Dividend stocks are great but dividend stocks with rising earnings and low valuations are even better

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email