Examples of companies we are looking at Dividend Income Investor.com

Wednesday, Oct 12 2011 by
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Examples of companies we are looking at Dividend Income Investorcom

We are looking for solid companies that are able to increase their dividends, preferably above inflation rate, each year, which we can buy when they are historically undervalued. Inherently these are defensive companies with sales and profits holding up even in a recession and have strong balance sheets that do not normally depend on huge amounts of debt. Currently, we are focusing on UK companies, but at some stage we also want to buy their Asian and other developing countries’ equivalents. Why, see our recent interview with global value investor Jeffrey Towson.

So, here are some UK examples.

Miners

I am a firm believer of the long term up-trend in commodities. Also in a real economic and financial collapse, with ensuing hyper inflation and currency depreciation, prices of gold and several other commodities would go stratospheric. I belief there are a number of undervalued gold miners out there, such as AIM-listed Goldplat which in my view currently represent deep value, but unfortunately it does not pay a dividend (yet).

Instead, we have invested in BHP Billiton (LON:BLT) during the recent sell-off when its share price was nearing historic undervalue levels. Comfortingly, during the last 14 years, BHP has been paying dividends during 12 years including 9 when it increased its dividends by more than 7.5%.

Supermarkets

Supermarkets are seen as an obvious defensive sector in tough times. Food sales provide defensive characteristics. Also, the current supermarket ‘price’ war underlines the importance of market share and pricing power. Earlier this year we invested in Tesco (LON:TSCO) - whose UK market share is nearly double that of Sainsbury and Morrisons. Long term, I expect major growth for Tesco to come from its expanding Far Eastern activities which in time will boost its dividends. Also remember Tesco is one of only very few companies listed in London which have been paying increasing dividends for more than 25 years. I like that continuity. Also, while starting from a low base dividend, Tesco has increased its dividend by 7.5% or more in 20 of the last 22 years. Value investor Warren Buffett is a long term investor, having only recently added more into his Berkshire’s holdings.

Consumer staples

Another angle on necessary recession expenditure are consumer-staples manufacturers Reckitt Benckiser and Unilever (LON:ULVR) . Both have global sales and global brands, but Reckitt's greater dependence on Europe (around 40% of profit and sales against Unilever's 30%) makes Unilever potentially the safer choice if and when parts of Europe default. Unfortunately both companies are not trading near enough their historical undervalue levels for us to warrant a purchase. As a result they have rather mediocre dividend yields. Nevertheless, they are definitely on our watch list.

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Alcohol and tobacco

Renowned for their sales withstanding recessions are companies with activities in alcohol and tobacco. Absolute winner, at least from a historic perspective, is British American Tobacco. With 13 out of 14 years of annual dividend increases above 7.5% what’s there not to like as a dividend income investor. Value investor Neil Woodford clearly agrees.

In the drinks sector, Diageo (LON:DGE) should fill the bill nicely, but again it is currently not trading at historical undervalue price levels. Instead, Sabmiller (LON:SAB) is an interesting alternative, also due to its lower gearing and more diverse emerging-market sales (Latin America and Africa), but again only if and when its share price comes down to historic undervalue levels.

Defence

While the defence sector is not entirely recession proof the obvious pick - BAE Systems - is suffering from US and UK defence budget cutbacks and a Euroland disaster is likely to curtail European governments' appetite for military intervention. However in-depth analysis shows some fairly strong fundamentals, and with five dividend increases above 7.5% in the last 12 years it is one of our holdings.

Utilities

Finally energy utilities offer resilience against most eventualities. Scottish and Southern Energy’s board is almost evangelical about paying out increasing dividends which is always a good sign from a dividend income investor’s perspective. Unfortunately, though, part of SSE’s results is dependent on fluctuating commodities risk, such oil and natural gas prices. No, thank you.

Instead, I prefer National Grid, which we picked up during the recent sell off. Regulated near monopoly National Grid owns many of the UK ‘pipes’ and pylons transporting gas and electricity irrespective of the price of natural gas or electricity. It also has a strong record of paying dividends with 14 years of dividend increases above 7.5% during the last 19 years.


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Disclaimer:  

Steven Dotsch - Managing editor - http://www.dividend-income-investor.com - Guide to Dividend Investing, at: http://www.dividend-income-investor.com/guide-to-dividend-investing/ - Dividend Value Profiles, at:   http://www.dividend-income-investor.com/british-american-tobacco/


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    BHP Billiton plc is diversified natural resources company. The Company generally operates through customer sector groups (CSGs). The Company operates in nine segments: Petroleum, Aluminium, Base Metals, Diamonds and Specialty Products, Stainless Steel Materials, Iron Ore, Manganese, Metallurgical Coal and Energy Coal. As of June 30, 2012, the Company was working in more than 100 locations worldwide. During the fiscal year ended June 30, 2012 (fiscal 2012), the Company total petroleum production was 222.3 millions of barrels of oil equivalent. During fiscal 2012, its aluminium had a total production in 1.2 million tones (Mt) of aluminium. In August 2011, the Company acquired Petrohawk Energy Corporation. On September 30, 2011, it acquired HWE Mining Subsidiaries from Leighton Holdings. On September 7, 2012, the Company announced the sale of its 37.8 % non-operated interest in Richards Bay Minerals. more »

    Share Price (Full)
    1929p
    Change
    9.0  0.5%
    P/E (fwd)
    12.2
    Yield (fwd)
    3.9
    Mkt Cap (£m)
    102,193

    Goldplat plc produces and explores precious metals on the African continent. The Company has two main business areas: the production of precious metals, primarily gold from materials acquired from primary produces and the mining of and exploration for gold. The Company operates in three segments: Recovery operations, Mining and exploration and Administration. The Recovery operations include the recovery of precious metals from metallurgical challenging materials and the processing of ore, sourced from other mining operations. Mining and exploration includes assets held for commercial exploitation of precious metals and exploration assets held where the commercial viability of the ore resource has not yet been evaluated or is in the process of evaluation. Administration includes activities conducted by holding companies in relation to the group and its subsidiaries. more »

    Share Price (AIM)
    4.63p
    Change
    -0.1  -2.6%
    P/E (fwd)
    21.1
    Yield (fwd)
    5.3
    Mkt Cap (£m)
    8.0

    Tesco PLC, incorporated on November 27, 1947, is engaged in retailing and associated activities in the United Kingdom, China, the Czech Republic, Hungary, the Republic of Ireland, India, Malaysia, Poland, Slovakia, South Korea, Thailand and Turkey. The Company also provides retail banking and insurance services through its subsidiary, Tesco Bank. The Company’s operations in the United Kingdom is the within the Company, with over 3,000 stores. The Company’s in-store picking model is complemented by a small number of specialized dotcom-only stores, which allow the Company to respond to customer demand. The Company’s Click & Collect service is a part of its multichannel offering and enables customers to pick up their shopping when and where it suits them. It has over 1,500 Click & Collect collection points for general merchandise and over 150 Grocery Drive-thrus in the United Kingdom. more »

    Share Price (Full)
    300.4p
    Change
    3.1  1.0%
    P/E (fwd)
    11.0
    Yield (fwd)
    4.7
    Mkt Cap (£m)
    24,081



      Is BHP Billiton fundamentally strong or weak? Find out More »


    3 Comments on this Article show/hide all

    Fangorn 13th Oct '11 1 of 3
    1

    Interesting list. Surprised there's no mention of Pharmaceuticals or Telcos ( the former rates particularly highly in Neil Woodford's defensive orientated Income funds)

    Otherwise spot on , most of which I actually hold in my high yield porty element.

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    Steven Dotsch 13th Oct '11 2 of 3

    Cheers Fangom

    The above is only meant as an example of several sectors, and some of the participants therein, which have a number of criteria which fit most of our investment philosophy. I could also have included the pharma, telco and some other sectors, including potential relevant companies therein. Next time.

    Book: Guide to Dividend Investing
    | Link | Share
    Fangorn 13th Oct '11 3 of 3
    1

    Look forward to the next installment. :)

    | Link | Share

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About Steven Dotsch

Steven Dotsch

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Steven is the editor of Dividend Income Investor.com and publisher of the Guide to Dividend Investing. Dividend Income Investor.com provide savers, investors and (future) retirees with concise information when dividend paying shares are historically under- or overvalued. Dividend Income Investor.com's investment strategy is aimed at maximising total returns by providing timely information to subscribers on when a dividend paying company is historically undervalued. Focus is on sound stock selection and the ability to recognise value using dividend yields in order to identify undervalued and overvalued shares. As part of the Dividend Income Investor.com premium content offering, subscribers have exclusive access to Dividend Value Profiles of companies whose share prices are historically undervalued, as well as occassional Dividend Income Reports. and DII Snapshots. The latter are mini reports based on exactly the same valuation methodology used for our Dividend Value Profiles and Dividend Income Reports with concise information whether a dividend paying company is currently historically undervalued, overvalued, or, somewhere in between. We have also put more than £75,000 of our own money behind our dividend income investment strategy creating the Dividend Income Portfolio which over time will invest in up to 30 dividend paying companies in order to create a diversified and increasing stream of tax-free dividend income. Steven Dotsch said "In the current climate of low interest rates, increasing inflation, and huge budget deficits now more than ever individuals need to take responsibility of their finances in making sure that they can afford to retire when they want to. By empowering individuals with the right information on how to build a portfolio of high quality dividend paying companies which consistently increase their dividends they can safeguard their futures.” Steven Dotsch - Managing editor - http://www.dividend-income-investor.com - For an example Dividend Value Profile click: http://www.dividend-income-investor.com/british-american-tobacco/ more »



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