This article first appeared on Dividends & Income
From the time we launched DTA’s Income Builder Portfolio on Jan. 16, 2018, through July 7 of this year, I had selected stocks on 65 different dates. On only 4 of those dates did I choose multiple companies.
Of the 7 stock-selection dates since then, I have gone for more than one company on 5 occasions — including my most recent pick of home-improvement giant Home Depot (HD) and medical-device maker Medtronic (MDT).
What gives? Why am I dividing Daily Trade Alert’s $1,000 allocation more times than not?
Am I trying out for a Doublemint Gum commercial?
I do like to think that each time I’ve done this, I have doubled investors’ pleasure … but no, Wrigley isn’t slipping me any money on the side.
Look, the market is close to its all-time high, and I’m finding fewer and fewer attractively valued companies I actually want the IBP to own. Even most of those already in the portfolio are quite expensive.
So if I’m going with pricier stocks, I’d rather invest less money in each.
That was the case again this time, and on Tuesday, Oct. 6, I executed purchase orders for both Home Depot and Medtronic.
Don’t Let This Happen To You, Kids
If the purchase orders in the graphic above look like something got messed up, it’s because … well … something did.
I was going to split $1,000 evenly between HD and MDT using Schwab Stock Slices, the brokerage’s relatively new format that allows investors to make purchases by designating dollar amounts rather than number of shares.
I built the order but then noticed that I needed to make a change and, in the process, I somehow eliminated MDT. Because I didn’t recognize the Medtronic omission when I clicked on Place Order, I ended up with $1,000 worth of Home Depot (3.5575 shares).
As wonderful as the company is, Home Depot already is our second-largest holding. It also is arguably overvalued (more on that later), so I didn’t want that much more of it for the IBP right now. Plus, I promised readers we were buying both HD and MDT.
I then used the remaining $562 available to buy 5.3823 shares of Medtronic, which is a far smaller position in the portfolio and which is trading at what appears to be a better valuation.
I had a minor freak-out when I first realized what I did, but it ended up being much ado about very little.
Still, in the future, I will be double-checking (and triple-checking and quadruple-checking) before I click Place Order.
Double The Dividend Pleasure
Both Medtronic and Home Depot have outstanding records of income production.
MDT is a Dividend Aristocrat, with 43 consecutive years of increasing its annual dividend, and HD has a 32-year streak without having reduced its payout. (HD did freeze its dividend during the Great Recession.)
These buys will bring nearly $22 more annual income into the IBP, and our full Medtronic and Home Depot positions will combine to generate more than 5% of the portfolio’s projected total income stream ($2,330) over the next year.
Our 14.1441 Home Depot shares will bring $21.22 in income into the IBP in December, and the 16.4445 Medtronic shares will generate $9.54 in January.
As we do with all 35 IBP positions, the dividends will be used to buy more shares of the two companies.
In HD’s case, the reinvestment will be done automatically by the brokerage. As for MDT, because it is a foreign company, Schwab doesn’t allow “dripping,” so we will use Stock Slices to manually buy a fraction of a share of Medtronic.
Using both methods, we’ll build up share totals and build up the income stream. No wonder we named this project what we did!
Analysts like both companies a lot. The first graphic from Thomson Reuters shows that 20 of 33 analysts rate Home Depot either a Strong Buy or Buy, while the second indicates that 19 of 27 market-watchers who follow Medtronic have issued either Strong Buy or Buy ratings.
I checked various analytical services, and the overall picture suggests that Medtronic is slightly undervalued while Home Depot appears somewhat overvalued.
Of Medtronic, Morningstar says:
We continue to incorporate fairly optimistic expectations for innovation in the structural heart, diabetes, and neurovascular units, as well as gradual margin expansion to account for efficiency programs and higher-margin new products.
Meanwhile, Argus is bullish on Home Depot, saying:
Home Depot delivered strong comparable sales and showed excellent operating and financial discipline in 1H21, which encompassed the first phase of the COVID-19 pandemic. The global health crisis has caused investors to differentiate between business models that are well positioned for the future and those that face significant challenges. HD’s 1H performance supports our thesis that the company is well positioned to deliver future earnings growth and market-share gains. With excellent financial strength, we believe that the shares stand out for diversified investors who are looking for exposure to discretionary retail.
FAST Graphs illustrations show that both HD and MDT are overvalued compared to their 10-year normal blended P/E ratios.
However, if one looks at a shorter time reference with Medtronic, and takes into account the significant growth expected for the 2022 fiscal year that begins next spring, MDT doesn’t appear nearly as expensive.
If MDT really does generate $5.75 earnings per share in fiscal 2022, that means the current price is only about 18 times forward earnings — which is just about the same as the blended P/E ratio FAST Graphs shows for these last 5 years.
Wrapping Things Up
I am not going to say that splitting our semi-monthly $1,000 allowance will be the new norm for the Income Builder Portfolio, but I have to admit that I like the idea of doubling our pleasure.
Back when I came up with the idea for the IBP nearly 3 years ago, it was supposed to represent the kind of portfolio a relative Dividend Growth Investing newcomer might build from the ground up.
Five-hundred bucks, or even $250, is a lot of dough to a lot of people, and there’s nothing wrong — and really, potentially everything right — with spreading one’s investing dollars around.
Home Depot and Medtronic are fine companies, and I feel good about adding any amount of shares to what I expect will be great holdings for years to come.
— 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