For the first 5 months of running my blog I analysed most (if not every) Dividend Aristocrats from US. I think it is a good step to start building my dividend portfolio, because as Warren Buffett says: Invest Only in Companies You Know and Trust. Now I think I know companies (a little bit, I will know them deeper with the passage of time) and taking into account high quality of increasing dividends I think I can trust them.
For now I have only two companies in my portfolio – ADM and WMT – and they are performing well. I have some money to buy more, but the problem is that currently I see that valuation of companies is quite demanding. In fact I would not buy WMT at $70, but on the other hand having no other alternatives I do not feel pressure to sell – maybe it is an emotional bias as it was my first investment.
Coming back to valuation I did some basic statistics. Generally I think companies are quite expensive – average/median EV/EBITDA for this year is around 11,8/11,6 and for next year it is about 11,0/10,9, which means results are expected to grow at around 10% rate. Not bad, but in the long term I think that premium to fair valuation is quite big (by fair I mean valuation at around 8 times EBITDA). The same is true for P/E ratio. For current year it is around 21,4/19,8 (mean and median) and for next year 18,1/18,0. Shiller PE ratio for the whole market is around 26, but it includes many high tech companies (+ I calculate simple mean, not weighted average). Comparing to whole market Dividend Aristocrats are cheaper, but whole market seems to be overpriced from historical perspective:
Then if we look on dividend yields it is around 2,5% for this year and 2,7% for next year. Higher than for S&P index.
Having said that I think that Dividend Aristocrats, as a group, should outperform S&P index – they are cheaper, high quality and are paying higher dividends. On the other hand when I am to invest in Dividend Aristocrat with yield of 3% and valuation 11 times EV/EBITDA I see a risk, that for example within next 4 years some crisis will come (it is 8 years from 2008) and valuation will decrease from 11 times EV/EBITDA to 10 times EV/EBITDA -> it means that gains from dividends can be fully offset by down-rating (on the other hand results should be higher). This is why I am rather cautious with buying shares. Look what’s happened to HCP after weaker guidance – share price dropped from around $35 to around $26. Now as I know and monitor whole dividend aristocrats list I am waiting for such special occasions. And I hope that during 1Q results season some will come and I will buy.
I think that currently posts will be published less intensively – I finished going through every Dividend Aristocrat and now I will write more occasionally (about non Dividend Aristocrats, ideas, “time to buy”). I hope you will send me also some buying ideas and we will discuss them!