Time. It’s the enemy of every investor.
Why? Because all we need is lots of it to easily and safely build wealth.
But since we’re all a bunch of procrastinators, time is always in short supply. So we’re often tempted to make stupid investments in an effort to make up for it.
And we wonder why investments made in haste seldom pan out…
Why bring any of this up? Because Dividend.com just sent out a list of “10 Big-Name Stocks” going ex-dividend this week.
The implication? If you’re lazy – or don’t have the time to do proper due diligence – you just need to select one of the stocks from the handy dandy cheat sheet, and presto! Instant dividend income.
If only it were that easy!
Now, I’m not saying that every last company on the list is a bad investment. What I am saying is this: If we expect to enjoy solid long-term returns, we need to do a smidgen more work than simply picking a dividend stock from a list with our eyes closed.
Did any make the cut? Read on to find out. Especially if you’ve got a fistful of cash that you’re dying to invest.
I know I always stress the importance of dividend growth over current dividend yield. But we need to start growing from a respectable base, right?
Otherwise, it’ll take too long for the yield on even the fastest dividend growers to expand to attractive levels.
For the purpose of this analysis, I used 2% as my cutoff.
With that done, we can now move on to dividend growth…
Get Growing or Go Home
The reason dividend growth is so important is two-fold. Everybody loves to get a raise. And everybody needs to get a raise each year in order to keep pace with inflation.
Of course, our goal is to outpace inflation. Accordingly, I used an average annual dividend growth rate of 5% as our threshold.
Doing so allows us to quickly eliminate one more company from the list: 3M Co. (MMM).
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And now we’re down to just five potential ex-dividend investments.
No Danger of a Dividend Cut
Last week, I shared three companies with eye-popping dividend payout ratios (DPR) that were in danger of a dividend cut. Naturally, we want to avoid any such dangers this week, too.
As you know, I normally insist on a DPR of 80% or less. Since we’re evaluating these stocks on such short notice, though, I want to be even more stringent and insist on a DPR of 60% or less.
The end result? Applied Materials (AMAT) doesn’t even come close to passing muster with its triple-digit DPR.
That leaves us with only four ex-dividend stocks to consider…
For the final round of cuts, we need to take valuation into account. After all, the last thing we want to do is overpay.
That rules out Johnson & Johnson (JNJ), as it’s trading at a double-digit premium to both the industry and its five-year average price-to-earnings ratio.
Of the three remaining stocks, Microsoft (MSFT) stands out as the clear winner.
It sports the highest yield, the highest dividend growth rate and the lowest DPR, which means it can afford to keep hiking its dividend in the years to come.
Not to mention, it’s the most attractively priced, trading at a discount to the industry and a modest premium to its long-term average.
Full disclosure: I couldn’t be more surprised than you about the outcome of this analysis. In July, I dubbed Microsoft “a stupid bet, not a contrarian one.”
Of course, back then I was evaluating the company’s ability to reclaim its glory as a top technology growth stock – not its merits as a dividend investment.
But I’m not afraid to admit that I may have spoken too soon.
If you’re a dividend investor in search of a last-minute investment, Microsoft represents a solid bet. But don’t delay a single moment.
In order to pocket the company’s next dividend payment of $0.28 per share, which will be paid on December 12, you need to buy the stock tomorrow.