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My Dividend Portfolio Looks Much Better Than Expected

Finding continued value in solid dividend stocks

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I purchased Visa (V) in 2011, because I liked the story about credit card processing business, the fact that there are only two major companies in the game, and the opportunity behind growth of cashless transactions worldwide. These were the reasons why I initiated a position in the stock despite the fact that the company has only been publicly traded since 2008. I expect Visa to either double or triple earnings per share over the next decade. This could translate in EPS ranging from $15 to $20 by 2023.

At a P/E of 20, this translates into $300 to $400 per share. I expect dividends to increase at the high end of these projections, and triple by 2023. Thus, I wouldn’t be surprised if Visa shareholders receive about $25 in dividends over the next decade, with annual dividends reaching $$ per share that year.

The return assumptions for the three stocks above, ignore dividend reinvestment, which would likely increase the annual returns slightly.

Nucor (NUE) is the odd one out, as it is a cyclical stock. The demand for steel fluctuates with the cycles in the economy, meaning that profits and revenues are highest at the peak of the cycle, and very depressed at the trough. This is why cyclical companies usually appear overvalued when their stock prices are low, and cheap when their prices are high.

During the last boom, Nucor earned $5.98 per share in 2008. In addition, the company kept raising its regular dividend even during the lean years after that. The thing that appeals to me is the fact that during the boom years through 2007 to 2008, Nucor paid special dividends every quarter to shareholders. Management was smart enough to realize that this boom in profits would likely be a short term event, yet they still wanted to keep the streak of dividend increases going, and reward long-term shareholders as well.

This is why if you simply look at trends in dividends per share, you might see a decrease in 2008. However, the regular dividend amount was never cut, but actually increased. If the US economy keeps expanding, we might see growth in earnings per share, and a lot of special dividends from Nucor. This is the one stock where I cannot provide a ten year guidance of earnings and dividends, but would likely hold on to either way. You get a stable and slowly rising dividend payment, plus a “lottery type” opportunity for special dividends when times are really good. Check my analysis of Nucor.

As a long-term investor, my holding period is in years for some stocks that don’t work out as well, to decades for the ones that keep delivering results over and over again. As such, it was helpful for me to go over my positions above. Overall, when I looked at what seemed to be the most overvalued stocks in my portfolios, I found out that there is nothing to be scared about. Some of the valuations were high either because of one-time events depressing earnings per share, and in those situations forward earnings per share showed a more reasonable valuation. In other scenarios, I reassessed the reason as to why I held on to certain stocks, and whether it still made sense to hold on to them.

Full Disclosure: Long D,V, NUE,TFX, BF-B,K,LOW,CL, EV, ADP, JNJ, YUM, ED, KMB,

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