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Hey everyone! I was sitting at my kitchen table doing an intense round of push-ups, reading articles and had a thought. I would love to share my point of view on the top 5 foundation dividend stocks that every beginning investor should own. Also, this could work for anyone that is also transitioning from more of the “sexy” (i.e. complex) type of investing into something that we, dividend investors, feel – just makes more sense.
In order to bring the excitement up a notch, we have drilled down to FIVE dividend stocks to be the foundation to YOUR dividend portfolio. The five dividend stocks represent different industries and hold the mighty, “Dividend Aristocrat”, crown, as well.
Finding the top 5 foundation dividend stocks
Stage 1 – Dividend Aristocrat
I feel that to make the top 5 foundation dividend stocks – one should be a dividend aristocrat, or one who has raised dividends for 25+ years. In fact, there are over 50 dividend paying stocks that have paid and increased dividends 25+ years! Quite a list if you ask me. Therefore – we have just drilled down the entire market (aka over thousands of stocks) into 50-55 stocks, what a screener. How about that for a quick dividend stock screener, eh?
A Dividend Aristocrat is no easy feat to accomplish. You have to go through all crises in the last 25+ years. Crises such as the Tech burst, 9/11, the great financial crisis or recession and most recently – the global pandemic from COVID-19 (or the coronavirus). Now, we have the great resignation and the highest inflation, ever. Dividend aristocrats provide a steady growing stream of passive income, in the form of dividend income, on your road to financial freedom. Definitely one of the major reasons I focus on them!
Related:
Let’s see what Stage 2 has.
Stage 2 – 2.50% Yield
The dividend yield! The dividend yield is what will determine how much dividend income you will receive from each share of stock. For example, a $100 price stock that pays you $2.50 per year in dividends, represents a dividend yield of 2.50%.
Not only do I think the top 5 foundation dividend stocks should be an aristocrat, but I think they should first have a yield higher than the S&P 500 stock market as a whole (over 1.60%-1.80%). In fact, I also think they should be over 2.50%, a little more greedy, eh? This literally cuts the list in half, I believe, to 35 stocks. I think that makes it easy for us. We literally have taken thousands of companies that are trading on the public stock market, this takes the nonsense out.
Stage 3 – 5 Industries
Now that we are down to 35 stocks, we need to pick 5 different industries. Think of being a consumer. What do we need in our every day lives to rely on?
First, energy & utilities are one. Second, food products would be another. Third, we can all agree healthcare should be included. What about inexpensive, quick access to food while on the road?
Those are a few glimpses of investing in industries that are for LIFE. In addition, these industries have stood the test of time. At least for now, no disruption has occurred to replace the need for good health or to eat. I am sure I will be long gone before that occurs! The stock market typically reduces volatility in those industries, because there is a constant need and cash flow/income stream to those businesses. Therefore – we are talking lower volatility on these investments, as well!
Related: Investing in Industries that are for LIFE
Step 4 – The Stocks
The moment we have all been waiting for – the Top 5 Foundation Dividend Stocks! We wanted to make sure we were in different areas/industries. This helps diversify and spread the risk – if one industry is poorly performing, the other may not be. In other words, it’s always nice owning more and being able to spread more eggs in one basket. For instance, if you owned stocks within the same industry, there may be better players than others. As a rule, completely different industries would be your best, first bet.
As very unintelligent, as this sounds, we wanted to pick companies that we have all heard of, that we see ourselves, family members and friends all use and enjoy. This makes it easier, as the company tends to never go out of style or, for a fun little pun, goes out of stock, we crack ourselves up let me tell ya.
These 5 Foundation stocks have provided a growing passive income stream to shareholders, in the form of dividends, for over 25+ years. In fact, some have even been growing their dividend for OVER 50+ Years! That, my friend, is what they call a Dividend King.
Related: Watch our video on Dividend Kings
We will put each 5 Foundation Stock through the trusty Dividend Diplomat Stock Screener, where we focus on the 3 critical dividend metrics of:
- Price to Earnings Ratio (P/E)
- Payout Ratio
- Dividend Growth
Therefore, the top 5 foundation dividend stocks selected are below!
1. McDonalds (MCD) – Food
Everyone loves the golden arches! Selling billions of hamburgers worldwide – it’s an internationally recognized company who continues to put smiles on individuals faces at every meal. Whoa, yield has sprung right at the 2.5% threshold. Thanks to McDonald’s recently increasing their dividend, fueling your passive income stream!
- Price to Earnings: Analysts are projecting $11.01 in earnings per share for the year 2023. Based on 5/9/23’s closing stock price of $296.66, the current P/E Ratio is 26.94. This is slightly on the high side for me, as I usually like, at least, below 20. The S&P 500 P/E ratio is typically in the 18-22 range. However, the market is currently close to 20.
- Payout Ratio: McDonald’s (MCD) currently pays out $1.52 per quarter, per share or $6.08 per year. Based on earnings of $11.01, the dividend payout ratio is 55%. They are right at the ceiling that I typically aim for, in that 40%-60% range. Not too far from being below, though!
- Dividend Growth: McDondald’s, as stated, is a dividend aristocrat. They have over 40+ years of consecutively increasing their dividend. WOW! Their 5 year average dividend growth rate is 8%. This definitely outpaces historical inflation.
2. Procter Gamble (PG) – Consumers goods
We see the name everywhere, we see them on the back of our packages – does Pampers, Bounty, Tide, Dawn, Crest, Gillette – all ring a bell? For example, I shave, use soap, brush my teeth, and wash clothes. Now, I don’t change diapers yet.. but if I did, PG is all over it.
- Price to Earnings: Analysts are projecting $6.40 in earnings per share for the fiscal year 2023. Based on 5/9/23’s closing stock price of $153.71, the current P/E Ratio is 24x. Similar to above, this is slightly on the high side for me, as I usually like, at least, below 20.
- Payout Ratio: Procter Gamble (PG) currently pays out $0.94 per quarter, per share or $3.76 per year. Based on earnings of $6.40, the dividend payout ratio is 58%. PG’s payout ratio has fallen enough below the 60% threshold. Check out the link to the Perfect Dividend Payout ratio, which is 40-60%!
- Dividend Growth: PG is a dividend aristocrat AND dividend king, with OVER 65+ years of consecutive dividend increases! Talk about putting the foundation, in dividend foundation stocks!
3. Johnson N Johnson (JNJ) – Healthcare Products
Johnson & Johnson is one of our favorite Dividend Kings! The company is called “Old Reliable” for a reason after all. Johnson & Johnson continues to make news with the big Kenvue (KVUE) spin-off in 2023. This will realign the company to compete with the pharmaceutical giants by spinning off its consumer brands division into a new entity. Still, Bert and his wife were lucky enough to build their positions to 100 shares each in this dividend giant.
- Price to Earnings: Analysts are projecting $10.65 in earnings per share for the year 2023. Based on 5/9/23’s closing stock price of $161.05, the current P/E Ratio is 15.12. Ah, a foundation dividend stock showing below the threshold I like to see. This ratio is below the S&P 500, as a whole, and does show signs of undervaluation.
- Payout Ratio: Johnson & Johnson (JNJ) currently pays out $1.19 per quarter, per share or $4.76 per year. Based on earnings of $10.65, the dividend payout ratio is 45%. JNJ has the perfect dividend payout ratio! They are RIGHT in the middle of the 40%-60% range. Beautiful.
- Dividend Growth: JNJ is yet ANOTHER dividend king, at over 50+ years, standing at 60 consecutive years of dividend increases. Therefore, they achieve both dividend aristocrat and divided king status. Further, I consider them “good old reliable” for a reason. Their dividend growth rate stands at 6% for their 5 year average.
4. Consolidated Edison (ED) – Utilities
Thomas Edison, need I say more? We always need to have light, plug things in and I feel like everything needs charged. Seriously – your car, phone, batteries, laptops and the list goes on. Further, as we move more towards electricity usage vs. oil, this utility company stands to gain ground. Introducing, Consolidated Edison (ED)
- Price to Earnings: Analysts are projecting $4.86 in earnings per share for the year 2023. Based on 5/9/23’s closing stock price of $98.77, the current P/E Ratio is 20.3. Ah, another foundation dividend stock showing below the threshold I like to see. This ratio is below the S&P 500, as a whole, and does show signs of undervaluation.
- Payout Ratio: Consolidated Edison (ED) currently pays out $0.81 per quarter, per share or $3.24 per year. Based on earnings of $4.86, the dividend payout ratio is 69%. Most utility companies are on the higher side and, in fact, ConEd is slightly lower than what we see in the industry. However, they are still slightly above the 60% ceiling, however.
- Dividend Growth: ConEd (ED) stands at over 48 consecutive years of dividend increases, easily a dividend aristocrat. Their 5 year average is slightly at/above inflation with 2.65% average dividend growth rate over the last 5 years.
5. Pepsi (PEP) – Consumer Goods
Pepsi is finally on the list! Yes, we showcased them at our 10,000 YouTube video celebration! Pepsi is a global brand, delivering beverages and snacks throughout the entire world. On your path to Financial Freedom, this is a great dividend stock to own for life. Think Pepsi, Gatorade, the Frito Lay Brand, Quaker Oats, the list really goes on. Here are the metrics.
- Price to Earnings: Analysts are projecting $7.32 in earnings per share for the year 2023. Based on 5/9/23’s closing stock price of $194.14; the current P/E Ratio is 26.5x. Definitely one of the highest on this list and shows the stock is currently overvalued in this recessionary stock market.
- Payout Ratio: Pepsi (PEP) currently pays a quarterly dividend of $1.265 per quarter or $5.06 per year. Based on EPS projections of $7.32, this is a dividend payout ratio of 69%, slightly on the high side for this dividend aristocrat / dividend king.
- Dividend Growth: Pepsi (PEP) is a new member of the dividend king club, increasing their dividend for 50 years! The average dividend growth rate is 7.39%, keeping up and – up until recently – crushing inflation.
*All stocks updated through 5/9/23
top 5 foundation dividend stocks summary
Those are TOP 5 Foundation stocks for ANY portfolio. You can be a beginner, current or experienced investor. These are dividend stocks that I continue to add to my portfolio on my road to financial freedom. Anytime I see undervaluation in one of stocks, I consider adding more to my current position, no doubt.
Isn’t it easy to see why the 5 dividend stocks above should be a strong foundation for a portfolio? Can you disagree these are 5 bad names to start with? Are there others that you would consider before purchasing these to begin your financial journey with dividend investing? Taking this information in consideration, you can have a rock-solid dividend portfolio out of the gate!
Obviously, this is all based on what valuation you give the stock at the time of purchase but I feel these are strong staples for anyone’s portfolio. As always, I would review our dividend stock screener to filter out different metrics to use.
I would appreciate the feedback to see your viewpoints, feedback and what you think should fall into this category! Thanks all for stopping by – good luck and happy investing!
-Lanny
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