Low Risk Stocks with High Dividends
Debt & Dividend Investing Basics
A Clearly Undervalued Stock
A Stock with Rising Dividends
My Role in the Investment World
After decades of investing, I have found that the best way to make money in the stock market is to invest in conservative stocks for long-term holding. No market timing, no charts—just buy blue-chip companies at low prices and wait patiently until the stock price becomes overvalued. If you follow my “buy low and sell high” value strategy, you too can take advantage of the natural ebb and flow of the stock market.
If you are thinking my profits are most likely minuscule because of my conservative style, I offer this evidence to the contrary. Three months ago in my Cabot Wealth Advisory, I wrote about how “Warren Buffett is the Best.” Well, one of my readers took me to task and asked: “With your investment philosophy, why not just buy Berkshire Hathaway (BRKB) … and let Warren do the work for you?”
Better than Warren Buffett!
My response was straightforward: “Warren Buffett’s record of performance is legendary, but upon close inspection, … my investment record is a little better.” Indeed, from 1996 through 4/1/2013 my investment models have produced a compounded annual gain of 14.0% before dividends (about 15.4% including dividends). The Dow Jones Industrial Average’s compounded gain is 6.1% per year during the same period, and the renowned Mr. Buffett’s return is 9.6% per year. Maybe these returns don’t sound spectacular, but if you had invested $100,000 with me at the beginning of 1996, your holdings would have grown to $950,000 during the past 17 years.
For this Cabot Wealth Advisory, I screened the Standard & Poor’s database of 5,600 stocks to find very low risk companies paying healthy dividends.
Low Risk Stocks paying High Dividends
Stocks with low risk are not hard to find. First, search for companies with little or no debt. Companies with heavy debt loads generally produce lower earnings when interest rates rise. Interest rates now reside at historic lows, but when rates rise, which they inevitably will, companies with too much debt will incur substantially higher interest expense. Buying companies with no debt or low debt makes sense, because low-debt companies will continue to perform well when interest rates rise.
Second, search for companies that pay high dividends. A company’s ability to continually pay dividends provides concrete evidence that the company is healthy and is performing well. Look for companies paying dividends yielding at least 1.0%. Lower dividend yields add less value.
Finding companies that have no long-term debt on their balance sheets and pay dividends is easy. Standard & Poor’s lists over 2,000 companies that pay a dividend and have no debt. You can whittle the list of 2,000 companies down to just a few: require your choices to have high Value Line financial strength ratings (Value Line is a financial service which offers ratings and data) and second, choose companies with strong Standard & Poor’s earnings and dividends rankings.
20 Great Low Risk Stocks with High Dividends to Buy
I set the bar high by requiring Value Line financial strength ratings of A++, A+, and A, and Standard & Poor’s Earnings and Dividends rankings of A+, A, and A-. Using these two criteria and the two parameters explained above (low debt, dividends), I came up with 20 companies which are solid candidates to buy now. If you would like to find out which companies made my list, just email us at TimothyLutts@cabotwealth.com.
After perusing the list of 20 companies using the four criteria described above, two companies stand out. Both companies have no debt; pay dividends yielding more than 1%; boast Value Line financial strength ratings of A or higher; and are rated A- or higher in the Standard & Poor’s Earnings and Dividends ranking system.
C.H. Robinson (CHRW) is one of the largest transportation and logistics companies in North America. The company was founded way back in 1905 and is now headquartered in Eden Prairie, Minnesota. C.H. Robinson provides multimodal transportation services and logistics through a network of 250 offices in North America, South America, Europe, Asia and Australia. The company offers several types of transportation services, including shipping by trucks, trains, ocean vessels and airplanes and using intermodal containers. The company does not own expensive transportation equipment.
C.H. Robinson has contracts with 50,000 transportation companies, including motor carriers, railroads, air freight and ocean carriers. The company maintains the largest system of transportation capacity in North America. In addition, C.H. Robinson operates logistics services, such as fresh produce transport, freight consolidation and cross-docking.
The company has demonstrated steady growth during the past 15 years with 14 increases in EPS (earnings per share) and dividend increases in every year.
Recent acquisitions and rising costs slowed earnings growth in 2012, which caused CHRW’s stock price to decline to bargain levels. I expect cost controls and cost savings from acquisitions to boost EPS by 19% during the next 12 months ending 3/31/14, after rising 6% in the past 12 months. Sales will likely increase 11%, same as a year ago.
At 17.6 times my forward EPS estimate of 3.40, and with a dividend yield of 2.3%, CHRW’s stock is clearly undervalued. CHRW shares will likely rise to my Min Sell Price of 79.25 within one to two years.
FactSet Research Systems (FDS) was founded in 1978 and has its main office in Norwalk, Connecticut. The company provides global economic and financial data to investment professionals, such as portfolio managers, analysts and investment bankers. FactSet combines data from hundreds of sources into a single online information library, accessible from numerous devices using a private network.
The network provides a direct, high-speed data link between FactSet’s mainframe computers and the client’s personal computer or network. The system allows users to download, search and analyze data in a variety of formats, including custom-designed reports. FactSet offers data on thousands of companies around the world.
Sales and earnings growth has continued unabated, because FactSet is taking market share from competitors such as Bloomberg, Dow Jones, Morningstar and Thomson-Reuters. FactSet’s first-class customer service and unique data sets have become a big advantage. The recent shift from bond mutual funds to stock mutual funds could enable FDS to beat 2013 forecasts. The company derives more than 80% of revenues from the mutual fund industry.
Sales will likely increase 10% and EPS should rise 12% during the next 12-month period ending 2/28/14. At 18.8 times my forward EPS forecast of 4.83 and with a dividend yield of 1.4%, FDS shares are a little high. The company’s superior sales, earnings, and dividend growth warrants the higher valuation. FactSet has paid dividends since 1999 and increased its dividend more than 10% every year since 1999. I expect another hefty dividend increase before mid-year. Buy FDS now with the expectation the stock price will rise to 111.11 within one year.
I will continue to follow C.H. Robinson, FactSet and other high-quality companies in my Cabot Benjamin Graham Value Letter. In my April issue, my comprehensive analysis turned up two new bargains that might be the best ideas I have come across in quite some time. I hope you will become a subscriber and won’t miss out!
Editor of Cabot Benjamin Graham Value Letter
Editor’s Note: You can find additional dividend-paying stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks.