A-List Dividend Duo

08/29/2013 7:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Two health sector stocks, a cancer insurance provider and a drugstore operator, have qualified for my list of A-List Dividends picks, says J. Royden Ward, editor of Cabot Benjamin Graham Value Letter.

In addition to strong dividend records, to meet my criteria, a stock had to offer strong chances of outperforming the market during the next six to 12 months.

I also looked for high-quality companies with an S&P Quality Rating of A+, A or A-. Lastly, I looked for companies with excellent prospects for the year ahead.

Aflac (AFL) is the world's largest supplemental cancer insurance provider, deriving 75% of its business from Japan.

Most of Aflac's policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee. Aflac Japan provides insurance to one out of every four Japanese households.

Aflac has expanded its product line and added new marketing venues in recent years. Non-cancer insurance policies now account for 70% of new sales.

AFL shares sell at 9.8 times latest EPS (earnings per share) and are rated Medium risk. Lower risk in Aflac's bond holdings and further successes in Japan will produce strong growth in future years.

The 2.4% dividend yield adds significant value. The quarterly dividend is 6% higher than a year ago.

The dividend payout ratio for AFL is a very conservative 23%—well below my maximum target of 50%. Aflac's dividend has been increased every year for more than 25 years.

CVS Caremark (CVS) is the leading pharmacy and drug management services chain. During the past several years, it has made several major acquisitions that have enhanced CVS's growth beyond expectations.

The company's latest purchase of UAM Medicare prescription drug plan business is producing better than expected sales and earnings results. CVS will likely continue its aggressive acquisition strategy in future years.

CVS's in-house Minute Clinics, which are staffed by nurse practitioners and physician assistants, are a big hit.

New drugs from drug makers, and the wider use of generic drugs, will keep earnings growing rapidly well into the future. Additional acquisitions could push sales and earnings higher than expected.

CVS shares are undervalued at only 15.7 times latest 12-month EPS. The dividend yield of 1.5% is modest, but I forecast dividend growth of 19% per year during the next five years. The balance sheet is strong, and my risk rating for CVS is very low risk.

CVS has paid a dividend every year since 1916. The quarterly dividend is 38% higher than a year ago.

CVS is included in my list of A-List Dividends because of its 16% dividend growth during the past decade. The dividend is well-covered by EPS—24% is half my maximum target of 50%.

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