5 Conservative And Cheap Dividend Stocks To Invest In – May 2023 – Seeking Alpha

Olivier Le Moal

Author's Note: This is our monthly series on Dividend Stocks, usually published in the first week of every month. We scan the entire universe of roughly 7,500 stocks that are listed and traded on U.S. exchanges and use our proprietary filtering criteria to select five stocks that are relatively safe and maybe trading cheaper compared to their historical valuations. Some of the sections in the article, like 'Selection Process/Methodology,' are repeated each month with few changes. This is intentional as well as unavoidable, as this is necessary for the new readers to be able to conceptualize the process. Regular readers of this series could skip such sections to avoid repetitiveness.

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A lot can happen in a month. The market recovered quite a bit during the last month before falling back somewhat in the last couple of days. During this time, another regional bank - First Republic Bank (OTCPK:FRCB) - in the U.S. failed and was quickly taken over by JPMorgan Chase & Co. (JPM) in a deal arranged by the Federal regulators.

The Fed is meeting right now as we write this and going to announce if they decide to raise the short-term interest rate by another 25-basis point or take a pause. The market is fully expecting another 25-basis point raise; however, there is not much consensus after that. We should get some clarity tomorrow, May 3rd.

By looking at the S&P 500 (SP500), we do not get the impression of a crisis or impending recession. Sure, the S&P500 is still down roughly 13% from its peak, but that is quite normal. However, there are two ominous signs that should cause some worry. First, almost all of the gains so far in 2023 are heavily concentrated in just the top seven technology stocks. Secondly, most of the U.S. yield curves are inverted and have been so for the last six months. If history is any guide, these are signs of a coming recession. But then, history does not always repeat. It could still turn out to be a soft landing or a minor recession if the Federal Reserve decides to pivot now.

All that said, a lot of uncertainties and stress points remain on the horizon. Against this backdrop, it is important to keep some cash reserves and dry powder ready to be able to deal with any scenario. At the same time, we believe it is not possible to catch the exact bottom (or the peak), so it is best to invest regularly and consistently in good, solid dividend-paying stocks when their valuations are attractive.

Data by YCharts

The main goal of this series of articles is to shortlist and highlight companies that have a solid history of paying and raising dividends. In addition, we demand that these companies support strong fundamentals, carry low debt, and are offered at a relatively cheaper valuation. These DGI stocks are not going to make anyone rich overnight, but if your goal is to attain financial freedom by owning stocks that would grow dividends over time, meaningfully and sustainably, then you are at the right place. These lists are not necessarily recommendations to buy but a shortlist of probable candidates for further research. The purpose is to keep our buy list handy and dry powder ready so that we can use the opportunity when the time is right. Besides, every month, this analysis is able to highlight a few companies that otherwise would not be on our radar.

Every month, we start with roughly 7,500 stocks that are listed and traded on U.S. exchanges, including over-the-counter (OTC) networks. By using our filtering criteria, the initial list is quickly narrowed down to roughly 700 stocks, which are mostly dividend-paying and dividend-growing stocks. From thereon, by using various data elements, including dividend history, payout ratios, revenue growth, debt ratios, EPS growth, etc., we calculate a 'Dividend Quality Score' for each stock that measures the relative safety and sustainability of the dividend. In addition to dividend safety, we also seek cheaper valuations. We also demand that the selected companies have an established business model, solid dividend history, manageable debt, and investment-grade credit rating.

This month, we highlight three groups with five stocks each that have an average dividend yield (as a group) of 2.68%, 5.14%, and 7.21%, respectively. The first list is for conservative and risk-averse investors, while the second one is for investors who seek higher yields but still want relatively safe dividends. The third group is for yield-hungry investors but comes with an elevated risk, and we urge investors to exercise caution.

Notes: 1) Please note that when we use the term "safe" in relation to stocks and investments, it should be interpreted as "relatively safe" because nothing is absolutely safe in investing. Even though we present only 5 to 10 stocks in our final list, one should have 15-20 stocks at a minimum in a well-diversified portfolio.

2) All tables in this article are created by the author unless explicitly specified. The stock data have been sourced from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, and CCC-List (drip investing).

Note: Regular readers of this series could skip this section to avoid repetitiveness. However, we include this section for new readers to provide the necessary background and perspective.

Goals:

We start with a fairly simple goal. We want to shortlist five companies that are large-cap, relatively safe, dividend-paying, and trading at relatively cheaper valuations in comparison to the broader market. The objective is to highlight some of the dividend-paying and dividend-growing companies that may be offering juicy dividends due to a temporary decline in their share prices. The excess decline may be due to an industry-wide decline or some kind of one-time setbacks like some negative news coverage or missing quarterly earnings expectations. We adopt a methodical approach to filter down the 7,500-plus companies into a small subset.

Our primary goal is income that should increase over time at a rate that at least beats inflation. Our secondary goal is to grow the capital and provide a cumulative growth rate of 9%-10% at a minimum. These goals are, by and large, in alignment with most retirees and income investors, as well as DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. That said, how you mix the two will depend upon your personal situation, including income needs, time horizon, and risk tolerance.

A well-diversified portfolio would normally consist of more than just five stocks and preferably a few stocks from each sector of the economy. However, in this periodic series, we try to shortlist and highlight just five stocks that may fit the goals of most income and DGI investors. But at the same time, we try to ensure that such companies are trading at attractive or reasonable valuations. However, as always, we recommend you do your due diligence before making any decision on them.

Selection Criteria:

The S&P 500 currently yields less than 1.60%. Since our goal is to find companies for a dividend income portfolio, we should logically look for companies that pay yields that are at least similar to or better than the S&P 500. Of course, the higher, the better, but at the same time, we should not try to chase very high yields. If we try to filter for dividend stocks paying at least 1.50% or above, nearly 2,000 such companies are trading on U.S. exchanges, including OTC networks. We will limit our choices to companies that have a market cap of at least $10 billion and a daily trading volume of more than 100,000 shares. We also will check that dividend growth over the last five years is positive, but there can be some exceptions.

We also want stocks that are trading at relatively cheaper valuations. But at this stage, we want to keep our criteria broad enough to keep all the good candidates on the list. So, we will measure the distance from the 52-week high but save it to use at a later stage. Also, at this initial stage, we include all companies that yield 1% or higher. In addition, we also include other lower-yielding but high-quality companies at this stage.

Criteria to Shortlist:

By applying the above criteria, we got around 600 companies.

As a first step, we would like to eliminate stocks that have less than five years of dividend growth history. We cross-check our current list of over 600 stocks against the list of so-called Dividend Champions, Contenders, and Challengers originally defined and created by David Fish. Generally, the stocks with more than 25 years of dividend increases are called dividend Champions, while stocks with more than ten but less than 25 years of dividend increases are termed, Contenders. Further, stocks with more than five but less than ten years of dividend increases are called Challengers. Also, since we want a lot of flexibility and wider choice at this initial stage, we include some companies that pay dividends lower than 1.50% but otherwise have a stellar dividend record and growing dividends at a fast pace.

After we apply all the above criteria, we're left with roughly 312 companies on our list. However, so far in this list, we have demanded five or more years of consistent dividend growth. But what if a company had a very stable record of dividend payments but did not increase the dividends from one year to another? At times, some of these companies are foreign-based companies, and due to currency fluctuations, their dividends may appear to have been cut in US dollars, but in reality, that may not be true at all when looked at in the actual currency of reporting. At times, we may provide some exceptions when a company may have cut the dividend in the past but otherwise looks compelling. So, by relaxing some of the conditions, a total of 74 additional companies were considered to be on our list. We call them category 'B' companies. After including them, we had a total of 386 (312 + 74) companies that made our first list.

We then imported the various data elements from many sources, including CCC-list, GuruFocus, Fidelity, Morningstar, and Seeking Alpha, among others, and assigned weights based on different criteria as listed below:

Below we provide a link to the table with relevant data on 360 stocks. This table can be downloaded by readers for further analysis. Please note that the table is sorted on the "Total Weight" or the "Initial Quality Score."

File-for-export_-_5_Safe_DGI_-_May_2023.xlsx

We will first bring down the list to roughly 60 names by automated criteria, as listed below. In the second step, which is mostly manual, we will bring the list down to about 30.

From the above steps, we now have a total of 63 names (some categories had more than 10) in our final consideration. However, the following stocks appeared more than once:

Stocks that appeared two times:

AAP, ADP, BXP, CI, CVX, KEY, OVV, TFC (8 duplicates)

After removing nine duplicates, we are left with 55 (63-8) names.

Since there are multiple names in each industry segment, we will keep a maximum of two or three names (from the top) from any one segment. We keep the following:

Financial Services, Banking, and Insurance:

Banking: (RF), (TFC)

Financial Services - Others:

Insurance: (CINF), (BEN)

Business Services/ Consulting:

(ADP), (V), (ACN)

Conglomerates:

(CSL)

Industrials:

(CTAS), (DE), (GWW), (BALL)

Transportation/ Logistics:

Chemicals:

Materials/Mining/Gold:

Materials:

Mining (other than Gold): (CF), (SCCO), (RIO)

Gold: (OTCQX:NGLOY)

Defense:

None

Consumer/Retail/Others:

Cons-Staples: (ADM)

Cons-discretionary: (NKE)

Cons-Retail: (LOW), (AAP), (TGT)

Communications/Media

(VZ)

Healthcare:

Pharma: (PFE), (JNJ), (MRK)

Healthcare Ins: (UNH), (CI)

Technology:

(MSFT)

Energy:

Pipelines/ Midstream: (EPD), (MPLX), (ENB)

Oil & Gas (prod. & exploration): (CTRA), (EOG), (CVX)

Utilities:

(NRG)

Housing/ Construction:

(LEN)

REIT:

(VICI), (BXP)

In this step, we construct three separate lists of five stocks each, with different sets of goals, dividend income, and risk levels.

The lists are:

1) Conservative Dividend list,

2) Moderately High Dividend List,

3) Ultra High Dividend List, and

4) A combined list of the above three (duplicates removed).

Out of the top 50 (55, to be precise), we make our judgment calls to make these three lists, so basically, the selections are based on our research and perceptions. So, while most of the filtering was based on automated criteria, the last step is a subjective one. We try to make each of the three lists highly diversified among various sectors and industry segments and try to ensure that the safety of dividends matches the overall risk profile of the group. We certainly encourage readers to do further research on the highlighted names.

Nonetheless, here are our three final lists for this month:

Final A-List (Conservative Safe Income):

Average yield: 2.68%

Table-1A: A-LIST (Conservative Income)

Author

**EOG - Dividend yield has been calculated based on the most recent quarterly dividend amount of $0.825 per share, plus some rough estimates for the variable amount. In the most recent quarter, $1.00 was paid as a variable amount, but it has come down from a level of $1.50 from the previous quarter. It is important to know the variable amount is variable and is subject to change every quarter. The dividend yield shown in the table above (for EOG) is simply our estimate for 2023 for the purpose of our rating calculations and may not reflect the actual yield. Please note that most financial websites show yield without including the variable amount.

We think this set of five companies (in the A-List) would form a solid diversified group of dividend companies that would be appealing to income-seeking and conservative investors, including retirees and near-retirees. The average yield of 2.68% is a bit low but still a lot more than that of the S&P500. The average dividend growth history is nearly 20 years, and the average discount from a 52-week high is very attractive for these stocks at -16%. Also, four of the five companies have an excellent credit rating of A- or higher. If you must need even higher dividends, consider B-List or C-List, presented later.

EOG (EOG Resources, Inc):

This month, from the energy sector, we have selected EOG (previously Coterra - CTRA); however, both companies can be treated at par. We may or may not have seen the peak price of oil in the year 2022; we do not know. Nonetheless, the investment thesis for most energy companies has changed quite a bit for 2023, and companies like EOG (or CTRA) are no exception. In the year 2023, the average oil prices are likely to be much lower than 2022 levels but still remain elevated. More recently, the outlook has soured further due to weakening demand.

In a nutshell, EOG is a solid energy company and is likely to do well as the world will keep using these products for a long time in spite of the push for green energy. EOG has many strong positives, including a solid balance sheet and a highly efficient but large footprint in U.S. operations. Moreover, the company is very shareholder friendly and has been distributing nearly 60% of cash flow to shareholders. Including the variable quarterly dividend of $1 a share and a regular dividend of $0.8250, the yield is roughly 6.1% at current prices. However, it should be noted that its variable payout that has come down from 2022 levels and is likely to moderate further in 2023 or 2024. The stock price appears to be undervalued and nearly 20% down from its 52-week high.

PFE (Pfizer):

We include Pfizer in all our lists this month for several reasons. The most important factors are a relatively cheaper valuation and its high dividend yield at 4.2% for a major pharma company. In its Q1'23 earnings (reported May 2nd), the company outperformed analysts' estimates in terms of both revenue (at $18.3bn) and EPS (at $1.23 on an adjusted basis). However, the stock price remained mostly flat because it is all about the future and not the past. In fact, the stock price has seen some weakness in recent months due to the Covid reset and the expected decline in Covid-related revenue going forward. Most of the Covid vaccine mandates are over now, and people are less likely to get those vaccines. All that said, the stock appears to be undervalued, as it is down nearly 28% from its peak in 2022. In its future plans, the company has committed to much higher R&D spending. Back in March this year, Pfizer also announced that it would acquire the biotech company Seagen Inc. (SGEN) for $43 billion. The deal appears to be expensive, but it should add long-term value to Pfizer. When the deal goes through, it is possible that the company may look at cutting some expenses, including reducing the dividend payout to some extent. So, the current high yield should be taken with a grain of salt. Also, investors should not expect very high growth from Pfizer, just a high and stable dividend from a large pharma company.

MSFT (Microsoft):

MSFT needs no introduction here. It is one of the seven top companies in the S&P500 index. It is by no means cheap and fully valued right now, especially after the excitement around its investment in ChatGPT and the strength it displayed in its most recent quarterly report. However, we believe the company is a long-term winner, and its fully valued price would not matter much if you were to hold it for the next ten or more years. The current dividend is low but as safe as it can get.

CSL (Carlisle Companies):

CSL is a global company that manufactures a diverse range of products, including highly engineered products. Its manufactures products for commercial roofing, architectural metal, and specialty polyurethane. It caters to customers in diverse sectors, such as aerospace, medical, defense, transportation, and industrials. It has paid and raised the dividend for the past 47 years and is just shy of 3 years of being a dividend king. The company's stock is trading at an attractive valuation and is nearly 30% below its 52-week high. Although the dividend yield is still too low at 1.33%, this is one of the safest, low-risk dividend aristocrats out there. We include this in our A-List for the reasons of safety, dividend reliability, and relatively cheaper valuation.

Final B-List (High Yield, Moderately Safe):

Average yield: 5.14%

Note 1: Very often, we include a few low-risk stocks in B-List and C-list. Also, oftentimes, a stock can appear in multiple lists. This is done on purpose. We try to make each of our lists fairly diversified among different sectors/industry segments of the economy. We try to include a few of the highly conservative names in the high-yield list to make the overall group much safer.

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5 Conservative And Cheap Dividend Stocks To Invest In - May 2023 - Seeking Alpha