Nikolaos Sismanis, contributing editor of Sure Dividend, specializes in reviewing the portfolios of leading hedge funds and money managers. Here, he reviews the top 10 holdings of the O'Shares US Quality Dividend ETF (OUSA). Kevin O’Leary is Chairman of O’Shares Investments; he is also well-known as “Mr. Wonderful” from the television show Shark Tank.

Investors who have seen him on TV have likely heard him discuss his investment philosophy. Mr. Wonderful looks for stocks that exhibit three main characteristics:

1) First, they must be quality companies with strong financial performance and solid balance sheets.

2) Second, he believes a portfolio should be diversified across different market sectors.

3) Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

4) OUSA owns stocks that display a mix of all three qualities. They are market leaders with strong profits, diversified business models, and they pay dividends to shareholders. The list of OUSA portfolio holdings is an interesting source of quality dividend growth stocks.

This article analyzes the fund’s largest holdings in detail. The top 10 holdings from the O’Shares FTSE U.S. Quality Dividend ETF are listed in order of their weighting in the fund, from lowest to highest.

No. 10: Lockheed Martin Corporation (LMT)

Dividend Yield: 3.26%

Percentage of OUSA Portfolio: 2.44%

Lockheed Martin Corporation is the world’s largest defense company. About 60% of the company’s revenues comes from the US Department of Defense, with other US government agencies (10%) and international clients (30%) making up the remainder.

Lockheed Martin reported weaker results for Q3 2021 on October 26th, 2021. Company-wide net sales declined to $16,028M from $16,495M and diluted GAAP earnings per share decreased to $2.21 from $6.05 on a year-over-year basis after a $1.7 billion pension charge.

Lockheed Martin’s backlog fell to approximately $134.85B with only an increase in Space. The company’s outlook for 2021 has been reduced to revenue of ~$67,000 and diluted earnings per share of $22.45 due to rebasing of revenue from the F-35 program, US exit from Afghanistan, and accelerated payments to suppliers. The company expects lower revenue in 2022 too. Lockheed Martin is acquiring Aerojet Rocketdyne for $4.4B subject to regulatory approval.

The company has grown its DPS for 20 consecutive years, with the latest increase coming in at 8.33%. We expect the dividend to grow ~8% on average annually and the payout ratio to range from 35% to 45%.

No. 9: Comcast Corporation (CMCSA)

Dividend Yield: 1.60%

Percentage of OUSA Portfolio: 2.52%

Comcast reported its Q3 2021 results on 10/28/21. For the quarter, the company’s revenues climbed 18.7% to $30.3 billion, adjusted EBITDA rose 18.1% to almost $9.0 billion, adjusted earnings-per-share (EPS) climbed 33.8% to $0.87, and free cash flow (FCF) of $3.2 billion.

Comcast’s Cable customer relationships were boosted by 4.2% to 34.0M. The company experienced net additions of 255K Cable Communications customer relations.

It also had broadband customer net additions of 300K as well as added 285K wireless lines (the best quarter since launch Xfinity Mobile in 2017). NBCUniversal revenue and adjusted EBITDA rebounded with massive jumps of 57.9% and 48.2%, respectively. The Sky segment saw revenue growth of 4.1% and adjusted EBITDA growth of 76.2% year over year.

We continue to believe that the company will remain a healthy solid dividend-paying company as it continues to generate substantial FCF. We updated our 2021 EPS estimate to $3.07 to reflect a strong rebound from last year’s disrupted results. The company has grown its DPS for 13 consecutive years, with the latest hike being by 8.7%.

No. 8: McDonald’s Corporation (MCD)

Dividend Yield: 2.15%

Percentage of OUSA Portfolio: 2.92%

McDonald's is the world's leading global foodservice retailer with nearly 40,000 locations in over 100 countries. Approximately 93% of the stores are independently owned and operated.

The $186.9 billion market cap company has raised its dividend every year since paying its first dividend in 1976, qualifying the company as a Dividend Aristocrat. In September McDonald’s declared a $1.38 quarterly dividend, marking a 7.0% year-over-year increase.

Over the last twelve months, McDonald’s has produced an all-time high EPS of $9.76. The stock trades for a premium based on its forward P/E as compared to its historical average, but that could be justified due to being a high-quality stock in the current environment of ultra-low yields.

No. 7: Apple (AAPL)

Dividend Yield: 0.54%

Percentage of OUSA Portfolio: 3.49%

Apple is the largest company in the world by market capitalization. Considering that Kevin O’Leary prefers companies that return capital to shareholders, this weighting might be a surprise.

Apple is the youngest dividend-paying stock analyzed in this article (based on dividend history), having only distributed income to shareholders since 2012. Since then, the dividend has grown more than 8x in a very short amount of period. This is in addition to the massive number of shares that have been repurchased over the years.

Apple’s sub-1.0% dividend yield, however, is the lowest yield among the top 10 largest holdings, but investors likely approve of this trade-off in income for the potential for high capital returns ahead.

Earnings growth and dividend yield may be offset by a significant headwind from valuation reversion as the stock trades with a multiple of 25x earnings compared to our target multiple of 18x earnings. Therefore, we expect the stock to produce subpar shareholder returns over the medium term.

No. 6: Pfizer Inc. (PFE)

Dividend Yield: 3.07%

Percentage of OUSA Portfolio: 3.53%

Pfizer Inc. is a global pharmaceutical company that focuses on prescription drugs and vaccines. It is a mega-cap stock with a market cap of $304.1 billion. Currently, Eliquis (cardiovascular), Ibrance (oncology) and Xeljanz (rheumatoid artacritis) are all posting robust sales growth. New launches of Vyndaqel and Inlyta are growing rapidly as well.

Pfizer’s current product line is expected to produce robust top-line and bottom-line growth in the medium term. This should be powered by a robust demand outlook for its medicines as well as the ongoing vaccine rollout which may result in recurring revenues going forward due to the possibility for multiple shots needed to fight COVID-19.

Growth will come from increasing U.S. and international sales for approved indications and extensions. On the other hand, growth is offset by patent expirations and also competition for Enbrel and Prevnar 13. Going forward Pfizer also has a strong pipeline in oncology, inflammation & immunology, and rare diseases. We are expecting a 5% EPS growth each year.

Pfizer also pays a solid 3.07% dividend. In all, we expect 12.4% annual returns over the next five years, making Pfizer an attractive dividend stock to buy now

No. 5: Verizon Communications (VZ)

Dividend Yield: 4.96%

Percentage of OUSA Portfolio: 4.14%

Verizon is telecom giant. Wireless contributes three-quarters of revenues, and broadband and cable services account for about a quarter of sales. The company’s network covers ~300 million people and 98% of the U.S. Verizon has now launched 5G Ultra-Wideband in several cities as it continues its rollout of 5G service. Verizon was the first of the major carriers to activate the 5G service.

Verizon again offered revised guidance for the year. The company expects adjusted earnings-per-share of $5.35 to $5.40 for 2021, up from $5.25 to $5.35 and $5.00 to $5.15 previously. Wireless revenue is projected to reach the top end of prior guidance of up 3.5% to 4%.

We expect 4% annual EPS growth over the next five years. The stock also has a 4.96% dividend yield. In addition to a considerable bump from an expanding P/E multiple, we expect total returns of ~12.8% per year for Verizon stock. This makes Verizon a high yielding security with decent growth potential.

No. 4: Procter & Gamble (PG)

Dividend Yield: 2.34%

Percentage of Portfolio: 4.62%

Procter & Gamble a stalwart among dividend stocks. It has increased its dividend for the past 65 years in a row. This makes the company one of only 32 Dividend Kings, a list of stocks with 50+ years of rising dividends.

It has done this by becoming a global consumer staples giant. It sells its products in more than 180 countries around the world with annual sales of more than $70 billion. Some of its core brands include Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B, and many more. These products are in high demand regardless of the state of the economy, making the company rather recession-proof.

Procter & Gamble is seen as delivering 4% earnings growth going forward. However, the stock is also overvalued at the current level, trading for a P/E ratio of 23.7 compared with our fair value estimate of 20. While we do not currently rate P&G stock as a buy due to its valuation, P&G is a strong stock for long-term dividend growth and current yield.

No. 3: Johnson & Johnson (JNJ)

Dividend Yield: 2.65%

Percentage of OUSA Portfolio: 4.62%

Johnson & Johnson is one of the most well-known dividend stocks in the marketplace, so it should come as no surprise that it is a top holding for OUSA.

Johnson & Johnson is a healthcare giant with a market capitalization of around $419.1 billion. It has very large businesses across healthcare, including pharmaceuticals, medical devices, and consumer health products.

It is also one of the most recession-resistant businesses investors will find. In the Great Recession, earnings-per-share grew by 10% in 2008, and 1% in 2009, at a time when many other companies were struggling. This resilience gives J&J steady profits, even during recessions, which allows it to continue increasing its dividend each year.

Johnson & Johnson announced that they would be splitting the company into two separate businesses. One is to hold the company’s pharmaceuticals and medical devices divisions, while the other would comprise the relatively smaller consumer health assets.

While the actual results of this spin-off are to be seen, investors should generally be excited about it, as it should unlock substantial value and operating efficiencies amongst Johnson & Johnson’s massive portfolio of healthcare brands.

J&J is a Dividend King, and it has an excellent balance sheet to help maintain its dividend growth. It has a AAA credit rating from Standard & Poor’s. The combination of valuation changes, EPS growth, and the 2.65% dividend yield lead to total expected returns of ~8.0% per year over the next five years.

No. 2: Microsoft Corporation (MSFT)

Dividend Yield: 0.73%

Percentage of OUSA Portfolio: 5.51%

Microsoft Corporation, founded in 1975 and headquartered in Redmond, WA, develops, manufactures, and sells both software and hardware to businesses and consumers. Its offerings include operating systems, business software, software development tools, video games and gaming hardware, and cloud services.

Microsoft’s cloud business is growing at a rapid pace thanks to Azure, which has been growing tremendously for a few years. Microsoft’s Office product range, which had been a low-growth cash cow for many years, is showing strong growth rates as well after Microsoft changed its business model towards the Office 365 software-as-a-service (SaaS) system.

Due to low variable costs, Microsoft should be able to maintain a solid earnings growth rate for the foreseeable future. Further, Microsoft displays a fine dividend growth record, numbering 20 years of consecutive annual dividend increases. The company has a renowned brand and a global presence, which provides competitive advantages.

Microsoft is also relatively resilient against recessions, and like J&J has a AAA credit rating. Unfortunately, Microsoft stock appears overvalued, with a forward P/E ratio of 36.2. Our fair value estimate is a P/E ratio of 24. Expected EPS growth of 7% and the 0.73% dividend yield will boost returns, but overall total returns are estimated at a negative 0.4% per year.

No. 1: Home Depot (HD)

Dividend Yield: 1.60%

Percentage of OUSA Portfolio: 6.02%

Home Depot was founded in 1978, and since that time has grown into the leading home improvement retailer with almost 2,300 stores in the U.S., Canada, and Mexico. In all, Home Depot generates annual revenue of approximately $130 billion.

Home Depot’s most compelling competitive advantage is its leadership position in the home improvement industry. Not only is demand for home improvement products growing at a high rate in the U.S., but the industry is highly concentrated with just two major operators (Home Depot and Lowe’s) taking the vast majority of market share.

Home Depot has also proven to be extremely resilient to recessions, including the coronavirus pandemic, which has arguably helped Home Depot as consumers spend much more time at home. Home Depot has a projected 2021 dividend payout ratio just above 45%, which indicates a safe dividend.

The company has generated strong earnings growth in the past decade, as it has successfully capitalized on the housing and construction boom that ensued following the Great Recession of 2008-2010. E-commerce is another growth catalyst for Home Depot, as the company has invested heavily to expand its digital footprint.

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