As promised at the end of Part I of this two-part article, in Part II, I am presenting three more selections that will help investors round out a well-diversified, income-producing portion of their investment portfolios that will provide them with a safe, growing stream of dependable dividends to supplement their overall investment strategy. In Part I, the three options presented provide exposure to the commercial real estate, technology, and private equity/financial sectors of the market. In Part II, I am going to add further diversification by including positions in solid businesses involved in consumer retail, drugs and insurance.
Rock-solid retail dividends with rapid growth
When it comes to looking for reliable, rapidly growing dividends in the consumer retail space, it just doesn’t get any easier than looking at the king of the mountain, Wal-Mart Stores, Inc. (NYSE:WMT). The behemoth of Bentonville is the world’s largest retailer with operations in all 50 states, Puerto Rico and 26 other countries.
For many years Wal-Mart was the retail momentum darling of Wall Street but has now transitioned to a slow-growth value play. However, in the case of Wal-Mart Stores, Inc. (NYSE:WMT), slow growth is defined as a projected annual increase in earnings over the next five years of 9.3% for a company with a dividend yield of 2.4%. If my favorite metric for valuing this type of business, the sum of five-year projected growth rate plus the dividend yield, is applied to Wal-Mart, the fair market value of the business is 11.7 times next year’s estimate for earnings.
An iconic name in drugs with strong and growing dividends
As the 6th most recognized core brand in America, Johnson & Johnson (NYSE:JNJ) is also one of the best known names in the world. When it comes to consumer sales in health-related items, familiarity breeds comfort and sales; comfort and sales breed profits and long-term security for investors seeking passive income.
The current dividend yield of 3.09% is almost 51% higher than the current average of 2.05% for the S&P 500. With iconic brands such as Band-Aid, Listerine and Tylenol, the well-known psoriasis drug Stelara, and DePuy, its widely used line of orthopedic supplies, it’s hard to imagine that this business is trading at a valuation only about equal to that of the S&P 500 average; but that is right where it sits today. A business of the existing size and scope of Johnson & Johnson (NYSE:JNJ) is not going to deliver rapid growth, but it will deliver safety and consistency, two traits that are critical considerations for income investors. The company has increased its dividend payment at an annualized pace of 8.18% per year over the past five years and with forward five-year earnings projected to grow at a rate of 6.2%, it is quite likely that investors can expect the current dividend to be increased at levels far above the inflation rate.
If insurance is good enough for Warren Buffett…
The man perceived by many to be the greatest investor of all times used insurance companies as the foundation upon which to build his Berkshire Hathaway Inc. (NYSE:BRK.B). Insurance is a bit of an ironic business in that it sells a product to anxious buyers who willingly pay for something they hope they will never use.
