Our Five Favorite Stocks From Mr. Free At 33’s Portfolio

Note: This is a guest post by Nick McCullum at Sure Dividend. I’ve never allowed a guest post here at Mr. Free At 33, but I thought this particular idea was pretty interesting for you readers. So I let them have at it. I’m presenting the article “as is”, with no input from me. Enjoy!

Mr. Free at 33’s FIRE Fund has allowed him to reach financial independence and retire early. It generates five figures (and growing!) of passive dividend income that covers his living expenses, allowing him to quit his job at the ripe age of 32.

Given this, its no surprise that his portfolio is full of high-quality dividend growth stocks. The portfolio even contains several Dividend Aristocrats – an exclusive group of dividend stocks with more than 25 years of consecutive dividend increases.

In this article, we explore our five favorite stocks from the FIRE Fund (in no particular order).

Dividend Stock #1: Bank OZK (OZK)

Bank OZK is a regional bank that offers services such as checking accounts, business banking, commercial loans, and mortgages to customers in Arkansas, Florida, North Carolina, Texas, Alabama, South Carolina, New York, and California. Until recently, Bank OZK was known as Bank of the Ozarks, but changed its name to reduce the association between its founding location and its name. Bank OZK was founded in 1903, is headquartered in Little Rock, Arkansas, and trades with a current market capitalization of $3.7 billion.

What immediately stands out about Bank OZK is the bank’s strong track record of profitable growth. The company has increased its per-share earnings in almost every year since the financial crisis. Since 2011, earnings-per-share have grown by nearly 12% per year. The company also paid rising dividends during the 2007-2009 financial crisis while many of its larger competitors were literally going out of business.

And yet, the markets refuse to reward the company for its robust track record. Bank OZK trades with a current price-to-earnings ratio of 8.2, which compares very favorably to its 10-year average of 12. Through business growth, valuation expansion, and steadily rising dividend payments, we believe Bank OZK is set to deliver strong returns moving forward.

Dividend Stock #2: Cardinal Health (CAH)

Cardinal Health is one of the ‘big 3’ drug distributors along with McKesson (MKC) and AmerisourceBergen (ABC). The company serves over 24,000 United States pharmacies and more than 85% of the country’s hospitals. Cardinal Health has operations in 46 countries with approximately 50,000 employees. With 32 years of consecutive dividend increases, Cardinal Health is a member of the Dividend Aristocrats Index.

Cardinal Health is an excellent example of a good business going through temporary trouble, which has created a buying opportunity for long-term investors. Over the long-term, the company has a strong growth record, with earnings-per-share growing by 11% per year since 2010. Over the last several years, however, results have been poor amid a pricing war between the drug distributors.

This has caused Cardinal Health’s valuation to plunge to very low levels. The company currently trades at a price-to-earnings ratio of 8.8 when its typical valuation is between 14 and 15 times earnings. Investors who purchase today stand to earn tremendous profits if Cardinal Health’s valuation can revert to levels near their historical norms.

Dividend Stock #3: Cullen/Frost Bankers, Inc. (CFR)

Cullen/Frost Bankers Inc. (hereafter Cullen Frost) is a regional bank based in the Texas metropolitan area. The bank can trace its roots back to 1868 when Frost Bank was established in San Antonio, Texas. In 1977, Frost merged with Houston-based Cullen Bankers to create the company’s current legal structure. Today, Cullen Frost operates 120 branches in Texas, offering consumer loans, commercial loans, investment management services, mutual funds, insurance, brokerage, and leasing. Cullen Frost trades on the New York Stock Exchange with a market capitalization of $5.8 billion.

Like Bank OZK discussed earlier in this article, Cullen Frost has an excellent growth record for a small-cap regional bank. The company’s average earnings-per-share growth over the last decade has been an outstanding 10% annually. Unlike Bank OZK, however, this company is not quite as appealing from a valuation perspective. The company’s current price-to-earnings ratio is 12.4. While not cheap, the bank is likely trading somewhere around fair value and investors should still earn solid returns thanks to business growth and steady dividend payments moving forward.

Dividend Stock #4: WestRock (WRK)

WestRock Co., in its current form, was created in July of 2015 by the merger of Rock-Tenn and Mead-Westvaco. Today, the company is a leading provider of differentiated paper and packaging solutions. In fiscal 2018, WestRock’s corrugated packaging segment and the consumer packaging segment generated 55% and 45% of its total revenues and 72% and 28% of its pretax income, respectively.

Unlike the other companies discussed in this article, WestRock has an extremely short operating history. As mentioned, the company was only founded in 2015, so investors do not have much of a track record to rely on when assessing its historical performance. To make matters worse, WestRock’s growth record since the merger is lackluster. The company has grown its earnings-per-share since 1.6% per year since inception.

However, the company’s forward-looking prospects are much better. WestRock is likely to benefit from two major growth drivers in the near future. The first is the growing market for North American corrugated packaging, which is being driven primarily by the expanding ecommerce network (and the logistics infrastructure that lies underneath of it). The second is the synergies from the takeover of KapStone, which have yet to materialize in full. Overall, we believe the future for WestRock is likely to be much brighter than its short period as a publicly-traded company, and the company’s high single-digit price-to-earnings ratio is presenting a great opportunity for investors to accumulate the stock today.

Dividend Stock #5: CVS Health Corporation (CVS)

CVS Health Corporation is an integrated healthcare services provider that operates a pharmaceutical services business, along with the country’s largest chain of pharmacies. The company operates more than 9,700 retail locations, 1,100 medical clinics, and services more than 90 million plan members.

CVS Health recently closed on the acquisition of health insurance company Aetna, which has the potential to be very transformative for the company. Unfortunately, we believe that the dilution associated with the transaction (CVS issued a great number of common shares to fund the purchase) may more than offset the promised ‘synergies’. Still, today’s investors in CVS may yet be handsomely rewarded – the company trades at a price-to-earnings ratio of around 8 today, well below its 10-year average of 14.6.

Final Thoughts

Mr. Free at 33’s FIRE Fund is full of high-quality dividend growth stocks.

With that said, not all high-quality stocks make high-quality investments at any given time. Valuation must always be taken into account.

In this article, we explored out five favorite investment ideas from the FIRE Fund. Each is trading below our estimate of its intrinsic value and may merit investment today.

P.S. If you’d like to build your own portfolio and become financially independent, check out some fantastic resources that are designed to help you build serious wealth and passive income!