Month 157 - 11 Large-cap Dividend-appreciating Members of “The 2 and 8 Club” that issue A-rated bonds - September 2024

Situation: We face a volatile market landscape, with bulls and bears vying for control. By owning stock in companies that pay a good and growing dividend, you can hedge that market risk. To quantify those terms: “Good” means an above-market dividend yield (~2%), as captured by VYM (Vanguard High Dividend Yield Index ETF). “Growing” means a compound annual growth rate (CAGR) for the dividend payout over the past 5 years has been at least 8.0%, and that the dividend payout has increased annually for 10+ years without producing an unsustainably high dividend yield, as captured by VIG (Vanguard Dividend Appreciation Index ETF). When a qualifying company issues bonds that carry an S&P credit rating of A- or better and has a 20+ year trading history, we say its stock is a member of the “2 and 8 Club”.    

Mission: Analyze all the companies in the iShares Russell Top 200 ETF that meet the above requirements. 

Execution: see Table of 11 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 5 stocks qualify: TXN, ADI, HD, CME, CMCSA. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AN) and negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). Two stocks (CME and CMCSA) have a BUY rating from Morningstar, and 6 companies have a Long-Term Debt to Equity ratio lower than 1.0 (TXN, ADP, ADI, BLK, ABT, CME). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (ADI, NEE, HD, BLK, ABT, CME, TGT, CMCSA). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Four companies have a PEG lower than 2.5 at both intervals (ADI, BLK, TGT, CMCSA). There are 2 A-rated companies in Column AO (NEE and TGT). Eight companies have a 10-yr total return greater than its Required Rate of Return (capitalization cost), per Columns D & E: TXN, ADP, ADI, NEE, HD, ABT, CME, TGT. ADI, CME are cited 5 times.

Bottom Line: If you want to buy stocks likely to achieve 10+% rates of return long-term, The 2 and 8 Club is a good place to shop. That’s because the accumulation of compound interest  through a DRIP is a better way to achieve that goal than trying to estimate future capital gains.

Risk Rating: 6 (10-yr Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into TXN, NEE, HD and CME.

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