This guest post
has been written by Mike McNeil, passionate investor, founder of Dividend Stocks Rock and author of The Dividend Guy Blog.
In the beginning
of this New Year, many investors review their portfolios. We all hope for a good
year on the market and, most importantly, steady dividend growth increase among
our portfolio. I selected three companies I think will perform well in 2017 and
will increase their dividend payouts.
3M (MMM)
Business model:
3M (MMM) produces
products like Scotch tape, projector systems, Post-it notes, Tartan track, and
Thinsulate. This is a conglomerate that produces products for many industries
and for both personal and business use, and their manufacturing, research, and
sales offices are all over the world.
3M shows all
the right characteristics to be part of a dividend growth portfolio. It is a
leader in many of its products and spend more than any of its competitors in
R&D. This makes 3M a chief of innovation that is always a few years ahead
of the competition. By improving its existing products and generating new one, 3M ensures to grow its revenue over time.
The company also
has a strong experience in making several “small” acquisitions throughout the
year and integrate them perfectly to their strong business model. Finally, 50%
of its revenue is coming from repetitive sales, generating a never ending
source of cash flow.
Potential risks:
There isn’t much
risk associated with 3M besides the fact that their growth in the upcoming
years may not be spectacular. This is not a company to buy in the hope of
showing double digit returns, but this is a company you can buy and sleep well
at night.
Dividend growth perspective:
3M has been
paying dividends to its shareholder for over a century and shows more than 50
consecutive years of consecutive increase. Over the past couple of years, 3M has been even more generous with their dividend increase and the payout ratio
has jumped to 54%. Still, there are plenty of room for management to increase
it in the future.
Investment thesis:
3M’s competitive
advantages are legendary. Industrial clients are reluctant to abandon such a
world class company for any competitors as they know 3M will deliver quality
products. Consumers continue to buy post-its again and again as the product is
well designed, well known and, most importantly, works perfectly. 3M shows one
of the strongest business models among the dividend kings and its dividend
growth potential will continue to be one of its most interesting
characteristics for investors.
BlackRock (BLK)
Business model:
Blackrock (BLK) is THE asset
manager in the US with the largest market share (Assets Under Management) with
its iShares division. With over $1 trillion invested in its ETFs, Blackrock shows
more than double the AUM of the second place State Street Corp. Considering
investors’ growing appetite for ETF; this is definitely an interesting economic
moat to develop.
Main strengths:
BlackRock has
built a solid reputation throughout the years and the recent shift in the
financial industry requesting more affordable investing vehicles for the
population is opening the door wide open to the world largest ETFs manufacturer. Blackrock has also built a strong mix of fixed income and equity products enabling
them to simply offer a different products to their clients instead of seeing
them selling their position and staying in cash.
Potential risks:
The thing with
financial companies is that they could always evolves around complex products
that could lead to bad surprises. Hopefully, new regulations for more
transparency will avoid such situation with BlackRock. In the event of any
market mood swings, Blackrock stock price is likely to fluctuate. However, those
risks are nothing to worry about if you are in for the long term.
Dividend growth perspective:
BlackRock has
been a steady dividend payer for some years now. The company has successfully
increased its dividend payouts for the past 6 consecutive years while
maintaining a payout ratio under 50%. The company is generating sufficient cash
flow to continues its streak for several years to come.
Investment thesis:
BlackRock is a
leader in its industry and has built a solid relationship with its clients.
They offer a wide variety of investing products going from fixed income to
equity. BlackRock shows a great combination of stable business model (due to
the size of its assets under management) and growth potential (as more institutions
are looking for low fees investment solutions). As we are bullish for 2017, we
see Blackrock getting more net inflows of cash flow in its products.
Cisco (CSCO)
Business model:
Cisco is the
reference for switches and routers across the world. The way we transfer data
throughout networks has been a pillar for many industries over the past decade.
While 2/3 of Cisco's revenue comes from switches and routers, the rest of Cisco sales are coming from faster-growing adjacent market segments such as wireless,
security, collaboration, unified communications, and data center products.
Main strengths:
As Cisco is the
undisputed leader in its industry, this is also the player which sets the
standards for other. This enable Cisco to benefit from a stronger premiums on all
its products and services. As many companies are dependent from their
networking system to operate on a daily-basis, their switching costs to ditch Cisco is enormous. Cisco has built and protected a very strong niche here.
Potential risks:
Unfortunately,
or fortunately technology keeps evolving. What Cisco is today (the leader of
switches and routers) could eventually disappear as the need for routers may
decline upon the arrival of a new technology. However, since Cisco keeps
acquiring smaller techno companies in order to stay on top of things, I’m not
too concerned about this potential fate right now.
Dividend growth perspective:
The dividend
payment has been increasing on a steady basis for the past 5 years while the
payout ratio remained well under control around 50%. Cisco core business is
very strong and generates a steady income to be distributed to shareholders.
Dividend increases in the forthcoming years are well secured.
Investment thesis:
The acceleration
of the “IOTH” (Internet of Things) where literally everything is meat to
communicate through a network is positioning Cisco in the driver seats for
several years to come. As it is already established as a strong leader in this
industry, there is more room for growth in the future.
Cisco has the
size and cash to follower their clients and answer their future needs. It can
then continue to benefits from the strong bond it has established with its
clients and offer further products to expand its revenues.
How I selected those 3 companies
Before I select
any companies to be part of my portfolio, I go through an exhaustive investment
process. Each company must meet the 7 dividend investing principles Those principles have been established based on
several academic studies and over a decade of my financial experience in the
stock market. I not only think those stocks will do well in 2017, but I believe
they will do well in the long run too. In my opinion, those are keepers for a
dividend growth portfolio.
Disclaimer: I
hold MMM, BLK and CSCO in my Dividend Stocks Rock portfolios.
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