Hunting For Dividend Value

There aren’t many undervalued dividend stocks out there right now. Even though I recently purchased two REITs I still think its tough to find dividend stocks that I want to buy at these levels.

And I’m not alone. I was reading about Dividend Mantra’s recent buy in Wells Fargo and I saw he believes as I do that there is just very little value to be had.

Dividend Stocks Are Popular

There are plenty of investors and traders that don’t agree with me and believe there is still a lot of value in the market. Friday afternoon CNBC was headlining an article titled Dividends are back and they aren’t going anywhere. For avid dividend investors this article doesn’t have anything new to say but it does express a sentiment that I keep hearing and that many of us already know. Payout ratios are at historic lows, company profits are up and dividend increases are on the horizon.

Selling Proctor & Gamble

One of the few dividend stocks that I held onto after liquidating most of my portfolio to buy a house was Proctor & Gamble. After a sizable run though I recently exited this position at $79 because I could no longer justify the valuation and I thought it was time to take a profit. PG’s payout ratio is currently 51% which is almost exactly the same as its 5 year payout ratio average of 50%. It has a 3 and 5 year dividend growth rate of 8.5 and 10% yet the stock is already up 20% in 2013. Colgate and Clorox (similar companies) which I have not owned in 2013 have similar stories. All three have P/E ratios in excess of 20 after their current run. As we know though that does not mean these stocks cannot keep moving higher.

I’m beginning to wonder if the safest dividends stocks will be rewarded with a premium valuation.

To satisfy the contrarian investor in me I started thinking about hated stocks. Microsoft and Intel took a hit after reports came out that PC sales had slowed and I still like those two stocks if for nothing else than the yield alone. Some of the old tech stocks might start looking attractive. One name I decided to move on last week was Apple.

Going Against The Trend

I’ve had a long history with Apple. I first bought in around $98 a share in 2008 and held my shares until the disappointing iphone 5 release. I had promised myself that if I was not wow’d by it I would start dumping shares and that is exactly what I did. My average exit price in the fall of 2012 was $655. I didn’t exactly sell at the top (Apple reached a high around $700 a share in September 2012) but I was happy with my profits.

Apple’s company fundamentals have been well documented and I’m not going to make a technical case for why I bought back in a $437 last week or why I think fair value is $575.

It really comes down to a few simple things for me:

1. The company has solid fundamentals
2. The company has ample cash and very low payout ratio (18%)
3. The yield is now attractive (2.5%)
4. I expect the dividend to be increased this summer (2013)
5. It is now hated by many investors
6. I remain optimistic about income growth due to its many competive advantages
7. There is a chance for new product development which will propel the stock higher
8. The stock is undervalued

Apple stood out as I hunted for value. I’m fully aware that it could drop to below $400 and if it does I may average down my investment. Of course I hope that does not happen.

What do you think about Apple at these levels and what dividend-paying stocks do you think are undervalued?

In a post later this week I’ll be covering the payout ratios of many popular dividend stocks to reveal which companies might be ready to boost their payouts. More on that later.


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