Tuesday, December 14, 2021

January 2022 Dividend Stock Watch List

As I'm writing this blog post, it's already mid-December. Surprisingly, we're in for a beautiful couple of days with temperatures topping out in the upper-50s Fahrenheit here in Central Wisconsin.

With that aside, I'm going to dive into three of the top stocks on my watch list heading into the New Year.

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Dividend Stock #1: 3M (MMM)

The first stock that I'm watching for next month is the Dividend King 3M. While I own 3M indirectly through my Capital Income Builder (CAIBX) mutual fund and a fractional share through M1 Finance, I don't yet actually own whole shares of the stock. There are a few reasons why I'm watching this stock for next month.

The first reason is because 3M is a diversified industrial. Since the company is balanced across a variety of healthcare industries like healthcare, electronics, and manufacturing, it should do well no matter what's going on in the world. 

This is why analysts are expecting 3M to deliver 8% annual earnings growth over the next five years. Such growth should allow for mid-single-digit dividend growth over the foreseeable future given that the stock's payout ratio for this year will be around 60%.

It also doesn't hurt that the company's interest coverage ratio through the first nine months of this year was 17.3. This suggests 3M is on solid financial footing, which will undoubtedly help me sleep at night owning the stock.

3M's overall quality with a 3.4% dividend yield at just 17 times next year's average analyst sets long-term investors up for success in my opinion, which is why I like the stock at its current $175 share price (as of December 13, 2021).

Dividend Stock #2: Union Pacific (UNP)

The next dividend stock that I'll likely be buying in January 2022 is the railroad titan Union Pacific.

Ever wonder just how what you buy actually ends up getting to a store near you? Well, after semi trucks, railroads are the next biggest means of transportation. This logistical option recently accounted for 28% of total U.S. freight movement by ton miles. In other words, railroads play a major role in the 57 tons of goods per American that are delivered each year!

What makes Union Pacific such a great railroad play?

The stock's more than 30,000 miles of track cover the western two-thirds of the United States, which makes it the major player in most parts of the country alongside Berkshire Hathaway (BRK.B) owned BNSF Railway.

The continued need for railroads to play a major role in the U.S. economy explains why analysts are forecasting that Union Pacific will grow its adjusted diluted EPS by 16.5% annually over the next five years.

That's likely why Union Pacific announced its second dividend increase of the year, which was 10.3% to boot. Looking ahead to next year, the stock's dividend payout ratio will only be 41.5% (assuming that total dividends paid next year are raised 10% to $4.72 divided by $11.36 adjusted diluted EPS average analyst estimate). This leaves plenty of room for Union Pacific's dividend to keep growing.

And given that Union Pacific's yield is currently 1.9% at its share price of $246 (as of December 13, 2021), the stock offers a market-beating yield that should grow at a double-digit clip for years to come.

Finally, the stock is trading at just under 22 times next year's earnings. This is a reasonable price to pay for Union Pacific's quality in my book.

Dividend Stock #3: Allstate (ALL)

The final dividend stock on my watch list for next month is the property and casualty insurer Allstate, which was the fifth largest P&C insurer last year as measured by direct premiums written. The company wrote a whopping $34.3 billion in premiums last year.

In a modern society such as ours, it's important for individuals to protect possessions like homes, cars, and rental properties. Allstate's business is to take on that risk for individuals at a price that adequately rewards the company for doing so. 

Because its industry is likely to steadily grow in the years ahead due to the essential nature, Allstate stands to benefit quite a bit. Even without considering the strong likelihood of interest rate hikes next year (which would raise Allstate's investment income on its $61.8 billion investment portfolio per page 5 of Allstate's Q3 2021 earnings press release), the company should do well in the years ahead.

The stock also boasts a 3% yield that is well-covered (yield based on $107 share price as of December 13, 2021). Since Allstate trades at just 10 times next year's average analyst EPS estimate, I believe the stock is a solid buy at this time.

Concluding Thoughts:

I'm expecting that I should once again have a bit more than $2,000 of capital at my disposal next month, which will allow me to put more money to work in some of the best businesses in the world.

Throughout much of this year, there has been an interesting development in my portfolio. That development is that I am focusing less on yield and more on quality stocks that grow their dividends at rather high rates. As my dividend income has grown over the years, I have come to appreciate less spectacular yields with incredible dividend growth rates. UNP and ALL perfectly fit into that category of strong dividend growth, while MMM's dividend growth has decelerated in recent years (though I don't believe that will be the case for much longer).


Are any of MMM, UNP, or ALL on your watch list for the month?

If not, what stocks are you watching for January 2022?

Thanks for reading and I look forward to your comments below!

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