Hey everyone! I was sitting at my kitchen table doing an intense round of push-ups, reading articles and had a thought. I would love to share my point of view on the top 5 foundation dividend stocks that every beginning investor should own. Also, this could work for anyone that is also transitioning from more of the “sexy” (i.e. complex) type of investing into something that we, dividend investors, feel – just makes more sense.
In order to bring the excitement up a notch, we have drilled down to FIVE dividend stocks to be the foundation to YOUR dividend portfolio. The five dividend stocks represent different industries and hold the mighty, “Dividend Aristocrat”, crown, as well.
Top 5 Foundation Dividend Stocks Video
Stage 1 – Dividend Aristocrat
I feel that to make the top 5 foundation dividend stocks – one should be a dividend aristocrat, or one who has raised dividends for 25+ years. In fact, there are over 50 dividend paying stocks that have paid and increased dividends 25+ years! Quite a list if you ask me. Therefore – we have just drilled down the entire market (aka over thousands of stocks) into 50-53 stocks, what a screener. How about that for a quick dividend stock screener, eh?
A Dividend Aristocrat is no easy feat to accomplish. You have to go through all crises in the last 25+ years. Crises such as the Tech burst, 9/11, the great financial crisis or recession and most recently – the global pandemic from COVID-19 (or the coronavirus). Dividend aristocrats provide a steady growing stream of passive income, in the form of dividend income, on your road to financial freedom. Definitely one of the major reasons I focus on them!
Related: Dividend Aristocrats – Who & What are They
Let’s see what Stage 2 has.
Stage 2 – 2.50% Yield
The dividend yield! The dividend yield is what will determine how much dividend income you will receive from each share of stock. For example, a $100 price stock that pays you $2.50 per year in dividends, represents a dividend yield of 2.50%.
Not only do I think the top 5 foundation dividend stocks should be an aristocrat, but I think they should first have a yield higher than the S&P 500 stock market as a whole (over 1.8/1.9%). In fact, I also think they should be over 2.50%, a little more greedy, eh? This literally cuts the list in half, I believe, to 26 stocks. I think that makes it easy for us. We literally have taken thousands of companies that are trading on the public stock market, this takes the nonsense out.
Stage 3 – 5 Industries
Now that we are down to 26 stocks, we need to pick 5 different industries. Think of being a consumer. What do we need in our every day lives to rely on?
First, energy & utilities are one. Second, food products would be another. Third, we can all agree healthcare should be included. What about communication, such as – to call, text, cell call, use the internet to e-mail? I believe that is highly needed in this day and age, with the trend to continue the usage.
Those are a few glimpses of investing in industries that are for LIFE. In addition, these industries have stood the test of time. At least for now, no disruption has occurred to replace the need for good health or to eat. I am sure I will be long gone before that occurs! The stock market typically reduces volatility in those industries, because there is a constant need and cash flow/income stream to those businesses. Therefore – we are talking lower volatility on these investments, as well!
Related: Investing in Industries that are for LIFE
Step 4 – The Stocks
The moment we have all been waiting for – the Top 5 Foundation Dividend Stocks! We wanted to make sure we were in different areas/industries. This helps diversify and spread the risk – if one industry is poorly performing, the other may not be. In other words, it’s always nice owning more and being able to spread more eggs in one basket. For instance, if you owned stocks within the same industry, there may be better players than others. As a rule, completely different industries would be your best, first bet.
As very unintelligent, as this sounds, we wanted to pick companies that we have all heard of, that we see ourselves, family members and friends all use and enjoy. This makes it easier, as the company tends to never go out of style or, for a fun little pun, goes out of stock (haha), we crack ourselves up let me tell ya (joking!).
These 5 Foundation stocks have provided a growing passive income stream to shareholders, in the form of dividends, for over 25+ years. In fact, some have even been growing their dividend for OVER 50+ Years! That, my friend, is what they call a Dividend King.
Related: Watch our video on Dividend Kings
We will put each 5 Foundation Stock through the trusty Dividend Diplomat Stock Screener, where we focus on the 3 critical dividend metrics of:
1.) Price to Earnings Ratio (P/E)
2.) Payout Ratio
3.) Dividend Growth
4.) Therefore, the top 5 foundation dividend stocks selected are below!
Therefore, the top 5 foundation dividend stocks selected are below!
1.) McDonalds (MCD) – Food
Everyone loves the golden arches! Selling billions of hamburgers worldwide – it’s an internationally recognized company who continues to put smiles on individuals faces at every meal. Whoa, yield has sprung above the 2.5% threshold.
1.) Price to Earnings: Analysts are projecting $8.31 in earnings per share for the year 2021. Based on 10/30/20’s closing stock price of $213, the current P/E Ratio is 25.63. This is slightly on the high side for me, as I usually like, at least, below 20. The S&P 500 P/E ratio is typically in the 20-22 range. However, the market is currently nearing 35x.
2.) Payout Ratio: McDonald’s (MCD) currently pays out $1.29 per quarter, per share or $5.16 per year. Based on earnings of $8.31, the dividend payout ratio is 62%. They are right at the ceiling that I typically aim for, in that 40%-60% range. Not too far from being below, though!
3.)Dividend Growth: McDondald’s, as stated, is a dividend aristocrat. They have over 40+ years of consecutively increasing their dividend. WOW! Their 5 year average dividend growth rate is 8%. This definitely outpaces inflation.
2.) Procter Gamble (PG) – Consumers goods
We see the name everywhere, we see them on the back of our packages – does Pampers, Bounty, Tide, Dawn, Crest, Gillette – all ring a bell? For example, I shave, use soap, brush my teeth, and wash clothes. Now, I don’t change diapers yet.. but if I did, PG is all over it.
1.) Price to Earnings: Analysts are projecting $5.93 in earnings per share for the fiscal year 2022. Based on 10/30/20’s closing stock price of $137.10, the current P/E Ratio is 23.12. Similar to above, this is slightly on the high side for me, as I usually like, at least, below 20. The S&P 500 P/E ratio is typically in the 20-22 range.
2.)Payout Ratio: Procter Gamble (PG) currently pays out $0.7907 per quarter, per share or $3.1628 per year. Based on earnings of $5.93, the dividend payout ratio is 53%. PG falls right into that perfect dividend payout ratio range. Check out the link to the Perfect Dividend Payout ratio, which is 40-60%!
3.)Dividend Growth: PG is a dividend aristocrat AND dividend king, with OVER 65+ years of consecutive dividend increases! Talk about putting the foundation, in dividend foundation stocks!
3.) Johnson N Johnson (JNJ) – Healthcare Products
Ever cut yourself and needed a band-aid? How about Neutrogena for your high school induced acne or pimples? Losing some hair – throw on some Rogaine. Splenda, Tylenol, Listerine, Visine, Benadryl, Acuvue, Neosporin – all JNJ brands. Given this stock’s better valuation, this could be on your list of stocks to buy starting out. You better believe it.
1.) Price to Earnings: Analysts are projecting $9 in earnings per share for the year 2021. Based on 10/30/20’s closing stock price of $137.11, the current P/E Ratio is 15.23. Ah, a foundation dividend stock showing below the threshold I like to see. This ratio is below the S&P 500, as a whole, and does show signs of undervaluation.
2.) Payout Ratio: Johnson & Johnson (JNJ) currently pays out $1.01 per quarter, per share or $4.04 per year. Based on earnings of $9, the dividend payout ratio is 45%. JNJ has the perfect dividend payout ratio! They are RIGHT in the middle of the 40%-60% range. Beautiful.
3.) Dividend Growth: JNJ is yet ANOTHER dividend king, at over 50+ years, standing at 57 consecutive years of dividend increases. Therefore, they achieve both dividend aristocrat and divided king status. Further, I consider them “good old reliable” for a reason. Their dividend growth rate stands at 6.3% for their 5 year average. Definitely outpacing inflation, as well.
4.) Consolidated Edison (ED) – Utilities
Thomas Edison, need I say more? We always need to have light, plug things in and I feel like everything needs charged. Seriously – your car, phone, batteries, laptops and the list goes on. Further, as we move more towards electricity usage vs. oil, this utility company stands to gain ground. Introducing, Consolidated Edison (ED)
1.) Price to Earnings: Analysts are projecting $4.50 in earnings per share for the year 2021. Based on 10/30/20’s closing stock price of $78.48, the current P/E Ratio is 17.4. Ah, another foundation dividend stock showing below the threshold I like to see. This ratio is below the S&P 500, as a whole, and does show signs of undervaluation.
2.)Payout Ratio: Consolidated Edison (ED) currently pays out $0.765 per quarter, per share or $3.06 per year. Based on earnings of $4.50, the dividend payout ratio is 68%. Most utility companies are on the higher side and, in fact, ConEd is slightly lower than what we see in the industry. However, they are still slightly above the 60% ceiling.
3.)Dividend Growth: ConEd (ED) stands at over 45 consecutive years of dividend increases, easily a dividend aristocrat. Their 5 year average is slightly at/above inflation with 3.10% average dividend growth rate over the last 5 years.
5.) AT&T (T) – Telecommunications
I have purchased AT&T a few times and they have a low growth, but sweet yield model – great to add a bang to anyone’s dividend income portfolio starting out! From Cell phones, to U-Verse, Direct TV, Movies (Time Warner), House lines, Internet – AT&T can provide it. AT&T (T) continues to be a beast in the entertainment and telecommunications industry, that’s for sure.
1.) Price to Earnings: Analysts are projecting $3.22 in earnings per share for the year 2021. Based on 10/30/20’s closing stock price of $27.02, the current P/E Ratio is 8.50. Showing signs of undervaluation, AT&T (T) historically is typically in the low p/e ratio. However, this is definitely below the stock market as a whole.
2.) Payout Ratio: AT&T (T) currently pays out $0.52 per quarter, per share or $2.08 per year. Based on earnings of $3.22, the dividend payout ratio is 65%. Similar to a few others above, they are right at the ceiling on the payout ratio end. Obviously, the global pandemic we are going through here in 2020 has impacted many company’s earnings. I do not have a concern here and AT&T (T) is usually at/near the ceiling.
3.) Dividend Growth: AT&T (T) is an interesting beast. They are a dividend aristocrat, but one that is yielding almost 8%! Therefore, the average dividend growth rate is usually ~2%. This one is a perfect model of high yield, low growth rate. Therefore, this keeps your dividend income in line with inflation.
- All stocks updated through 10/30/2020
top 5 foundation dividend stocks summary
Those are TOP 5 Foundation stocks for ANY portfolio. You can be a beginner, current or experienced investor. These are dividend stocks that I continue to add to my portfolio on my road to financial freedom. Anytime I see undervaluation in one of stocks, I consider adding more to my current position, no doubt.
Isn’t it easy to see why the 5 dividend stocks above should be a strong foundation for a portfolio? Can you disagree these are 5 bad names to start with? Are there others that you would consider before purchasing these to begin your financial journey with dividend investing? Taking this information in consideration, you can have a rock-solid dividend portfolio out of the gate!
Obviously, this is all based on what valuation you give the stock at the time of purchase but I feel these are strong staples for anyone’s portfolio. As always, I would review our dividend stock screener to filter out different metrics to use.
I would appreciate the feedback to see your viewpoints, feedback and what you think should fall into this category! Thanks all for stopping by – good luck and happy investing!