Up until my late 40s, my investments had been limited to mutual funds. I followed the stock market, but funds made more sense to me until competition drove trading commissions down and I had built up enough of a nest egg to add individual stocks to the mix. After doing some reading into investing styles, dividend growth investing seemed like the right fit for me, and my two largest stock holdings have what it takes to keep giving annual raises to shareholders.
Chevron
Chevron (CVX 0.26%) was one of the first individual stocks I bought, and the reasons it joined my portfolio in early 2007 are still valid today.
- The stock trades in value territory, with a current price to earnings ratio around 9.
- It has a good dividend yield of about 3%.
- A low payout ratio and earnings growth prospects should allow the annual raises to continue.
To put a Foolish cap on Chevron's dividend growth history, it recently joined the S&P Dividend Aristocrats, a list of companies that have raised their dividend payouts every year for at least 25 years.
Why Chevron over other energy companies? As a U.S. investor, I wanted to stay close to home, which gave Chevron, ExxonMobil, and ConocoPhillips an edge over the non-U.S. based majors. I also wanted a company with exposure to different segments of the energy industry. At the time I made the decision, Chevron was less expensive based on P/E and had a higher dividend yield than ExxonMobil; I honestly don't recall why ConocoPhillips didn't make the cut. Today, Chevron still has an edge over ExxonMobil in dividend yield, and P/E ratios are nearly identical. ConocoPhillips recently spun off its refining operations, so it no longer has as wide a range of operations -- for better or worse -- as Chevron or ExxonMobil.
Even though I still own the stock, a Foolish investor might ask if I would buy Chevron today. The only reason I would not add to the position today is it's already a large piece of my portfolio. If it weren't one of my largest holdings, I'd be adding more.
McDonald's
2012 wasn't full of Happy Meals for McDonald's (MCD -0.32%) shareholders as the share price took a 12% dive. Among the 30 Dow Jones Industrial Average stocks, only Hewlett-Packard and Intel fared worse. Concerns over sales in the weak eurozone and uncertainties over a new CEO kept pressure on the stock price. But, McDonald's continued to do exactly what I bought it for: pay the dividend and give shareholders a raise, continuing a streak dating back to 1976.
My CAPS pitch from 2008 sums up the reasons I bought McDonald's and continue to hold it: "Growing business, decent dividend, solid history of dividend hikes. Business should be pretty steady through a slowing U.S. economy while benefiting from growth overseas." The U.S. economy may not be slowing anymore, but it sure isn't growing much, and overseas growth is still a key part of the business strategy at the Golden Arches.
Other contenders for this spot include Yum! and Starbucks. McDonald's got the nod over Yum! because of management using the menu to adapt to markets. Starbucks didn't make the cut because of valuation.
As with Chevron, the only reason I wouldn't buy McDonald's today is it's already one of my largest holdings.
Foolish takeaway
Good current yield and prospects to continue providing shareholders with a raise every year make McDonald's and Chevron good candidates to join the stock team for an income-oriented portfolio. I can't tell if they're good fits for your portfolio or investment objectives, but I believe they're still great fits for me.
McDonald's and Chevron are my top two stock holdings, but our co-founder Tom Gardner recently revealed his top two stocks as well. For the names of that surprising pair of companies, just click here.
