Value Investing News

31 best large cap stocks to buy for 2012 selected for valuation and earnings growth

Harleysville Group Inc. underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States. Linked here is a detailed analysis and commentary.

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We all want to find the best value when we buy a stock. One of the oldest metrics used is the price earnings (P/E) ratio. It is calculated as the market value per share divided by earnings per share (EPS). A high P/E ratio infers that investors expect strong future earnings growth. Conversely, a low P/E suggests limited future growth.

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A stock with a high yield doesn’t mean much if the dividend is cut or eliminated, and the stock price declines significantly. Sometimes it is desirable to accept higher risk for a higher yield. Other times we may be accepting higher risk and are not being adequately compensated for the additional risk.

To succeed as a dividend growth investor you must identify and purchase stocks with sustainable dividend growth. Inertia is powerful force. Once a company has established a track record of growing its dividend over the decades and developed a shareholder base that expects higher dividends each year, it becomes increasing difficult for management to cut or fail to raise their dividend.

This is the second installment in a multi-part series that looks at different sectors that have traditionally been very friendly to dividend investors. Each of these sectors have attributes that make the companies in them potentially desirable to long-term buy-and-hold dividend growth investors.

Harleysville Group Inc. underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States. Linked here is a detailed analysis and commentary.

Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations. Linked here is a detailed analysis and commentary.

As dividend growth investors, we want to limit our purchases to only the very best stocks. Our first step is to look at published lists of dividend companies such as S&P 500 Dividend Aristocrats, US Broad Dividend Achievers™ Index and The U.S. Dividend Champions. These lists are used to narrow the population of all publically traded companies down to the very best dividend stocks.

As a dividend growth investor, two of the best dividend lists for further research that I have focused on have been the S&P Dividend Aristocrats and the Dividend Achievers Indexes.

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Personal Insurance, Commercial Insurance, and Specialty Insurance. The company is member of the S&P Dividend Aristocrats index.Chubb has increased dividends for 45 years in a row.

In my dividend database, I track nearly 190 stocks in 19 different sectors. Generally, the characteristics of certain sectors tend to match those that dividend growth investors are looking for, thus their constituents are often make better dividend investments. In the case of the stocks I track, nearly half of them are in these three sectors:

Over the past 80 years, stocks have returned almost 10% annually. Dividends have accounted for approximately 40% of average annual returns. At the same time inflation has averaged 3% annually. These numbers are all averages however – investors cannot expect to generate 10% per year in total returns every single year. Stock returns fluctuate over time.

A stock with a high yield doesn’t mean much if the dividend is cut or eliminated, and the stock price declines significantly. Sometimes it is desirable to accept higher risk for a higher yield. Other times we may be accepting higher risk and are not being adequately compensated for the additional risk. What can we do to help gauge the risk of an individual stock?

Any company could afford to boost distributions in a single year. Any type of business could also have a high yield, especially if it distributes all of its cash flows to shareholders. It takes a special kind of a business model to afford a proper balance between investing back into the business and distributing excess profits to shareholders.