Welcome to my section on “Foundation” stocks. In this section we’ll look at some companies that have very few, if any, red flags with regards to stock price and dividend cuts. These companies will be safe and steady and ones that we should feel safe buying at pretty much any price point. Of course, no stock is ever safe from risk entirely, but by looking at various stats and performance we hope to minimize the risk we are taking. I am invested in all of these companies and will continue to buy more to develop a solid foundation in my portfolio that will keep paying me dividends for years to come.

Let’s go over the criteria I will use for determining a safety threshold.

Market Cap: Greater than 2 Billion (we don’t want to invest in any smaller companies as they tend to be less stable)

Price/Earnings Ratio: Under 20 (just a check to make sure the price isn’t out of control compared to the earnings – most consistent payers will be around or under this number)

EPS Current: 3+ (solid positive earnings today)

EPS (5 year projection): 3+ (solid positive earnings expected going forward)

History: 20+ years of increasing dividends at least once per year (we want companies that have shown the ability to keep payments increasing through recessions)

Dividend Increases: 1,3,5 year increases all over 5% (we want our dividend growing at a sufficient rate to outpace inflation)

Payout Ratio: Under 70% for the last 5 years (provides a safety net to afford payments in low earning years and allows for room to increase dividends going forward)

 

Below is a list of the evaluations:

 

1. JOHNSON & JOHNSON (JNJ)

2. AFLAC (AFL) 

3. GENUINE PARTS COMPANY (GPC)

4. TARGET (TGT)

5. 3M CO (MMM) 

 

I will update these stock positions each month in the MonthlyCents post.