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Picking My Next Investment

October 12, 2010

We should have enough saved up by the end of the year to invest another $1,000. In looking at our portfolio as it is constructed now, and using the list of sectors from Yahoo Finance, we have no stocks in either the “conglomerates” or “industrial goods” sectors. So I’m going to target those sectors to diversify our holdings.

I also want a reliable dividend payer, so I’m going to use the “dividend kings” as a filter. Dividend Kings have raised their dividend annually for at least 50 years. That’s a solid track record and lives little doubt, in my mind at least, of the companies’ stability.

The Candidates

Using those 2 criteria, there are 3 stocks that fit the bill – MMM (conglomerate) and DOV & EMR (industrial goods).

To further screen the stocks, I’m using the scorecard approach used by the Motley Fool, shown here. Basically, there are 10 categories, and for each one satisfied, the stock gets a point. For my purposes, I’m going with the most points for my next investment. For tiebreakers, I’ll use dividend payout ratio and price/book ratio.

And the Winner is….

3M Company (MMM) comes in with a total of 7 points, failing on both growth measurements (1 and 5-year revenue growth) and gross margin.

Dover (DOV) came in at 3, only satisfying the debt to equity, current ratio and 5-year dividend growth criteria.

Emerson Electric (EMR) scored 5, missing on the 1-year annual revenue growth, gross and net margins, debt to equity ratio and P/E ratio.

I have to say it was not as close as I originally thought. 3M also had the lowest payout ratio of all at 38% (DOV had 40%, EMR 53%) which tells me it has more room to raise dividends should the opportunity arise.

I also like this stock because it has a wide variety of products – everything from office supplies to healthcare to industrial goods. It has continued to raise (albeit slowly) its dividend payment despite the recession, but has a history of increasing the dividend by a greater percentage during booms. This, combined with the lower payout ratio, partially offsets the 2.4% yield, which is usually too low for my taste.

Unless something dramatic happens before we accumulated the $1,000 needed to invest, I will most likely buy this stock. I’ll continue to keep my eye out for a better fit in the 2 sectors mentioned until I pull the trigger.

What are your thoughts on the 3 companies mentioned? Is there something I should have considered that was not covered?

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