January is always a good month for me as I receive my year-end bonus! Each year, I use this bonus to fund my retirement account and maximize my savings. Enjoying life today is important, but being able to enjoy it once I’m retired is priceless!
So each beginning of the year comes with the very same question: How Should I Invest My Money?
The question is always the same but the answer differs greatly from one year to another. My portfolio evolves as the market does. This year, I mentioned that I wanted to buy shares of a consumer stock. I have had my eye on McDonald’s (MCD) for a while now but want to open my horizon. I would have bought MCD when it was trading at $88 but my bonus just came in too late. This is why I’ve decided to search for other options.
Looking at My Own Dividend Stock List
I don’t know if you are like me, but each time I have money in my brokerage account, the money is calling me! I feel the urge to invest it, ASAP. This is kind of dumb since I won’t be touching this money for the next 30 years but still, I want to invest it right away. I feel that I’m leaving money on the table if I don’t trade right away.
However, buying a stock in a hurry is probably the worst decision an investor could do. This is why I keep a “watch list” close at hand. Each time I have money to invest; I can turn around and see what’s on my watch list. At least these are pre-screened stocks representing all decent investments (in my opinion anyways!)
At the beginning of the year, I produced 30 stocks analyses (20 US and 10 CDN stocks). They are what I call The Best 2013 Dividend Stocks. Last year, my virtual portfolio did better than well and this is why I repeated the experience again this year. This is my own watch list for the year. Out of my list of 30 stocks, a few are part of my “favorites”:
KMB (well diversified, strong company)
MAT (I’m still a kid 😉 )
PG (long term bet since P/E ratio is high)
BDI (leader in a growing industry)
EMA (a lot of promising projects)
You can buy the book here for only $2.99 and get the 30 stock analyzes.
Then Something Caught My Attention…
In order to create my top 30 stocks list, I’ve used severe metrics. Each stock must show the following characteristics:
Dividend yield over 3%
Positive 5 year dividend growth
Dividend payout ratio under 75%
Return on equity (ROE) over 10%
Positive 5 year annual income growth rate
Current price / earnings ratio (PE) under 20
When screening with these metrics, I ensure that I select long term dividend payers. I obviously ignore a lot of stocks that could be of interest. On the other hand, the point of screening the stock market is to put several companies aside in order to save time.
This is when something caught my attention while reading the financial news; Apple (AAPL) dropped significantly in value. If you look at the past 6 months, the stock dropped by 25%:
What’s the reason for this huge drop? It’s mainly because investors don’t see how Apple can continue their incredible growth. Both the iPod and iPad models have been duplicated faster than a virus. It has become complicated to create a “new” product to sell to customers. For that reason, the stock is going down.
But the key here is how much Apple is valued compared to its peers?
As at February 8th, here’s the P/E ratio of some other techno stocks:
Company Ticker P/E Ratio Dividend Yield
Apple AAPL 10.62 2.26%
Microsoft MSFT 14.96 3.37%
Intel INTC 9.76 4.32%
FaceBook FB 1939(!) 0.00%
Google GOOG 23.84 0.00%
IBM IBM 13.86 1.70%
Seagate Technology STX 4.59 4.38%
Garmin GRMN 12.91 4.72%
You may argue with my comparison but I tried to reach as many techno stocks that could share a part of the business with Apple. This is not easy as these companies now have several departments and it’s hard to compare one with the other. Technically, there are no companies doing the same thing as Apple!
What I see from this chart is that Apple is undervalued compared to other techno stocks companies and has a lot of room to distribute a higher dividend. The company will continue to sell their products and a P/E ratio at 10 is more than reasonable.
Besides my dividend metrics (minimum 3% and dividend growth positive over the past 5 years), Apple meets my other requirements. In addition to that, it also has the possibility of increasing its dividend over the next 5 years and will definitely meet my 5 years dividend growth requirement in the future. These are the main reasons why I decided to buy AAPL.
Since it’s a “gamble” as I also count on a stock rebound to $600-$700, I only bought 5 shares at $453.81 for a book value of $2,269.05. This represents 7% of my RRSP portfolio. I figure it’s a good gamble since the drop potential is quite low (I can’t see AAPL trading at a P/E ratio of 8!) and the impact on my portfolio is not too important.
I have some liquidity in my portfolio and I’m expecting to complete another of my investing goals for 2013 by buying an ETF. I’ll do some research and share my experience with you in the future.
What do you think? Do you think that Apple is a good pick around $450-460?
Disclaimer: I hold shares of AAPL.
I disagree with the Apple mania. They make great products. That I cannot disagree with. But there is way too much fawning over Apple at the moment.
I also think that the stock price is going to continue to slide downwards over time as Apple becomes less innovative over the years. Repeatedly creating blockbuster products in entirely new spaces is a tough business model.
I do not really like Apple, even at this price. Hey Mike, you’re The Dividend Guy, why buy APPL? I think the odds that they will come up with a new invention are very low, and if they do, there will be ample time to buy. I would have bought a stock from your list of 30 best, like EMA. Good luck!
Here’s the point: I think APPL will stop being a “growth stock” and transform into a “dividend stock”. look at the P/E ratio, it’s lower than most companies in the techno environment.
Michel,
I agree with you, EMA is very tempting! hehe!
I was intrigued by APPL after that big drop a couple weeks ago as well. To me it is trading at a great value right now as with a P/E ratio that low there is no future growth priced in. So if APPL can continue to grow earnings I think this will turn out to be a good investment for you.
The reason I didn’t buy is because as others have mentioned I’m not sure if they will get that earnings growth. They need to continue to innovate and sell more great products. What will happen if consumer sentiment decides Samsung Galaxy is the next great thing and they start buying Galaxy phones rather than IPhones? AAPL’s business will be cut in half. If you don’t think it could happen just ask those who invested in RIMM when the Blackberry was the best phone out there. For me there was just too much uncertainty on how they will continue to make money in the future. A decline in the popularity of their current products and less innovation going forward could actually mean a decline in earnings going forward rather than growth. This is what scared me off.
I hope I’m wrong though. I hope AAPL continues to come out with great products and this turns out to be a great investment for you! Good Luck!
I’m really nervous about any tech stocks. The stock prices in many cases seem to go all over the board. It seems with certain tech industries it just takes a little bad news or a competitor coming out of nowhere to send the prices into a tailspin. I’d rather pass up and look for a nice slow line generally going upwards over a 10 year period and pick that.
EMA – Like that girl so many years ago, the one that got away on me. I was going to pick it up for $18/s… Will it continue to haunt me and keep trending up despite what many analysts predict? (being overvalued) Seems to be a word thrown around a lot these days.
It also has that nice steady upward sloping line since the downturn.
I agree with you that Apple’s price drop is mainly due to a slower growth outlook. Apple is transitioning from a growth to a dividend story. Also, the shares were destined to sell off a bit after the impressive run up in price. However, when articles are published with the headlines like – Apple: Analyst Ups Target To $1,111; Worth A Trillion Bucks? It’s time to get out. Personally, I think Microsoft would have been a better choice. Exciting? No, but Windows is part our daily lives. Image the world without it. MSFT is also “cheaper” than Apple on a forwards earnings basis as well. Be careful with tech and P/E, especially when your earnings rely on a few products being successful. RIMM had a P/E of 4 at some point.