This article first appeared on Dividends & Income
Mischievous Mr. Market has given investors whiplash so far in 2020.
The year began with a sprint to a record high on Feb. 19 … followed by a 34% crash that bottomed out on March 23.
From there — to heck with the global coronavirus pandemic! — we experienced an almost inexplicable rise, led by a relatively small number of companies that benefited from the work-from-home environment.
That resulted in a new high on Sept. 2 … before another pullback ensued, as folks grew concerned that COVID-19 wasn’t going to vanish miraculously after all.
After all of that, here’s something crazy: The S&P 500 Index sits only a few points above where it ended 2019.
Through all the ups and downs, I’ve just kept putting together DTA’s Income Builder Portfolio, doing my best to select high-quality companies for us to buy — $1,000 at a time, twice every month.
My latest purchase on Daily Trade Alert’s behalf took place Tuesday, Sept. 22.
Using Schwab Stock Slices, I split the grand right down the middle between biopharmaceutical giant Amgen (AMGN) and industrial conglomerate Honeywell (HON).
It was our third buy of each company, slightly boosting the Healthcare and Industrial sectors’ weight within the IBP.
In my previous article, I outlined numerous reasons for selecting these newest Dow Jones Industrial Average components.
And given that we mostly use the Dividend Growth Investing strategy in building the IBP, the businesses’ income-growth track record ranks high on the list.
Both companies’ dividend histories exhibit the beautiful “staircase pattern” I love to see.
Each has grown dividends at a double-digit-percentage clip over the last five years, and each rewarded shareholders with a 10% hike in its most recent increase.
These buys will bring nearly $25 more annual income into IBP, and our full AMGN and HON positions will combine to generate almost 5% of the portfolio’s projected income stream over the next year.
Both companies are expected to pay their next dividend in early December.
Our 12.6545 Amgen shares will generate $20.25 in income for the fourth quarter.
Honeywell, meanwhile, is expected to announce its next increase sometime in the next few weeks. If we take coronavirus-related issues into account and go with a very conservative 3.3% hike (a third as much as has been typical for HON), that would raise the quarterly dividend to 93 cents and bring $15.34 into the portfolio.
As we do with all 35 IBP positions, the dividends will be used to repurchase shares in the companies from which they came. That’s how we build our income stream, and it’s how this project got its name.
Analysts surveyed by Reuters are pretty bullish on both companies, as illustrated by the following graphics:
Rather than inundate everyone with miles of images and charts, here is a table that summarizes how various analysts regard Amgen and Honeywell:
The most attractive valuation metrics and price targets are in green, and the blue indicates fair value estimates that are within 5% of of what we just paid for AMGN and HON.
Both companies look just about fairly valued here. An investor certainly might be rewarded by waiting for better entry points, but one also could do a lot worse than these high-quality businesses at their current prices.
According to the FAST Graphs images below, both companies appear to be somewhat overvalued compared to their historic norms.
However, for investors who believe Amgen and Honeywell will emerge from the pandemic relatively unscathed and then will grow earnings as suggested in the yellow-highlighted areas of the graphs, this could be a reasonable time to buy.
My colleague, Dave Van Knapp, put Honeywell through his “Valuation Zone” in July. Read his article HERE.
Wrapping Things Up
With the coronavirus still wreaking havoc, a U.S. Supreme Court seat suddenly open, racial tensions still in the air, and an election only 6 weeks away, this year is nowhere near settling down into anything resembling “normalcy.”
So anybody who claims to know what mischief Mr. Market might have in mind for us for the rest of 2020 (and beyond) is lying.
More than ever, it’s important to invest in great businesses that have stood the test of time and figure to keep on keepin’ on. I believe Amgen and Honeywell are two such companies.
Reminder: I also manage the Grand-Twins College Fund, which includes what I think are 15 interesting, high-quality stocks. I will be doing an update on that portfolio in early October; until then, see the GTCF home page HERE.
— Mike NadelWe Just Bought These Stocks for the Income Builder Portfolio [Buy Alert!]
While there are many things to like about these fine companies, their dividend growth ranks high on the list.
Source: Dividends and Income