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Creating my February 2016 Undervalued Dividend Watch List

///Creating my February 2016 Undervalued Dividend Watch List

Creating my February 2016 Undervalued Dividend Watch List

Every month I try to find undervalued consistent dividend paying stocks that have increased their dividend for 20+ years to make up my dividend watch list.  I love consistent dividend paying stocks for one main reason – creating a reliable stream of income that will increase with inflation.  I wish this account was bigger, but it is currently only a fraction of both my assets and total net worth.  Notwithstanding, it is easily my favorite part.

Dividend Stock Investment Portfolio Activity in January 2016

January 2016 was a complete and utter shit storm in the markets; the S&P lost 5.07%!  So I decided to buy more than what I usually buy more than my usual $500/mo.  As such, in January 2016,

  • I purchased 15 shares of TRowe Price for $65.9361/share.  I was excited to see TRowe come up on my screen because that means their valuation had to come down.  Which was exactly the case Trowe was down approximately 20% from its 52 week high.
  • I purchased another 16 shares of THFF, a regional bank at 32.43/share
  • I purchased another 10 shares of UTX at $84.426/share

I am hoping that striking while the market is in free fall will pay off in months and years to come.

While I didn’t “sell” anything I had an interesting change in my portfolio.  Two of my holdings ACE and Chubb merged.  From Insurance Journal,

ACE Ltd. and Chubb said they have received all necessary regulatory approvals and will close their $29.7 billion merger agreement today, Jan. 14 – six months after the companies first announced their surprise deal.

The newly-combined company will use the Chubb name and be the world’s largest publicly traded property/casualty insurer.

***

Under the terms of the transaction, Chubb shareholders will receive $62.93 per share in cash and 0.6019 shares of ACE stock. Based on the closing price of ACE stock on June 30, 2015, the total value is approximately $124.13 per Chubb share, or $28.3 billion in the aggregate. This is the equivalent of $125.87 per Chubb share using ACE’s 20-day volume weighted average share price for the period ending June 30, 2015.

As such my ACE shares disappeared, and I received $1,351 in proceeds  and now own almost 18 shares of the new, combined company.

My January 2016 Dividend Income

Dividend Income by Month January 2016 Dividend income by Quarter January 2016
I am not seeing the growth I’d like in income, but that is completely my faultAnti-Complacency is my 2016 Goal.

Attempting to Find Undervalued Dividend Stocks for February 2016

This, along with everyone of these dividend research updates, is a snap shot in time (this one was done on February 9, 2016) so please don’t use my data as anything but a starting point for your own research.  I use the metrics below to get to a “watch list” which I use to try and purchase equities closer to their 52 week low.

My Dividend Investment Portfolio Screening Criteria

All data is taken manually from Morningstar:

  1. The company has paid increasing dividends for at least 20 years
  2. The stock has to have a Price to Earning that is lower than their industry average. The Price to Earnings Ratio has to below 20 regardless of industry average.
  3. The Operating Margin has to be in line with the particular stock’s industry average. I want companies that are profitable as compared to their peers.
  4. Price to Book – Should be below 4, but if it isn’t it must be in line with industry average (or lower).
  5. This monthly update the Dividend Yield should be above 2.5% (changes whenever I update the list depending how many stocks I have left after the first 4 steps).
  6. Dividend Payout Ratio – It took me a long time to add this to my screen but basically I weed out any companies paying over 60% to shareholders.  Couple reasons.  The main one would be sustainability, but also, I do want growth in a company and if all dollars are going out it is likely to hurt the company in the long run.

Since this is a snapshot I am not that strict since I am well aware that if the underlying company opens a tenth of a percent the other way it could pass a metric.

Definitions of Metrics Used for my Dividend Investment Portfolio

Since not everyone knows what I am talking about above I have provided definitions (all quotes taken from Investopedia):

  • Dividend Champions are those dividend paying American companies that have increased their dividend for the past 25 years. Unlike the Dividend Aristocrat list they do not have to be part of the S&P 500. I have included a part of the dividend contenders list (20+ years but less than 25).
  • P/E is Price is “a valuation ratio of a company’s current share price compared to its per-share Earnings.”
  • Operating margin is “a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.”
  • Price to book is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.
  • Dividend Yield a “Financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated by dividing Annual Dividends per Share by Price Per Share”
  • Payout Ratio – “The proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage…The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payments.

Applying My Stock Screen Criteria to the Dividend Champion List

First Stock Screen: PE Ratio

The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average. I also eliminate companies with PEs above 20 regardless of their industry average.  This usually brings me from 150 or so equities to about 50, but like I said earlier, with equities getting pummeled year to date the number after this step was only 68.

 

Second Stock Screen: Operating Margin

Next I eliminated those stocks whose operating margin was not better than its peers in the industry. I want the companies I invest in to be more profitable than their peers. This way unless there is a huge problem with the industry they’d be less likely to stop doing something (i.e. paying increasing dividends) that they have been doing for the past 20+ years

 

Third Stock Screen: Reasonable Price to Book or in line with their Industry

I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued. In an effort to limit the unintended consequence of choosing stocks with a lot of tangible or financial assets on the books I have started comparing the P/B to the industry average.

Fourth Stock Screen: Yield

While I am not ‘chasing yields’ I am attempting to create a dividend portfolio, so the next elimination step was to remove any stocks with a dividend yield of less than 2.5%. This is a moving target depending on how many stocks I have left to choose from. Sometimes I go for 2% sometimes 4%

 

Fifth Stock Screen: Payout Ratio

Next, I eliminated those equities whose payout ratio was 60%+.

Dividend Stock Watch List for January 2016

NameSymbol
Arrow Financial Corp.AROW
BancFirst Corp. OKBANF
Caterpillar Inc.CAT
Chesapeake Financial SharesCPKF
Community Bank SystemCBU
Community Trust Banc.CTBI
Cullen/Frost BankersCFR
Dover Corp.DOV
Eagle Financial ServicesEFSI
Farmers & Merchants BancorpFMCB
First Financial Corp.THFF
First of Long Island Corp.FLIC
John Wiley & Sons Inc.JW.A
Johnson & JohnsonJNJ
MDU ResourcesMDU
MSA Safety Inc.MSA
NextEra EnergyNEE
Northeast Indiana BancorpNIDB
Sonoco Products Co.SON
T. Rowe Price GroupTROW
Target Corp.TGT
Thomson Reuters Corp.TRI
Tompkins Financial Corp.TMP
UGI Corp.UGI
United TechnologiesUTX
Wal-Mart Stores Inc.WMT

 

Anyone have any particular feeling about any on the watch list?

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By | 2016-04-20T21:58:05+00:00 February 10th, 2016|Dividend Investment Portfolio|2 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

2 Comments

  1. DivHut February 11, 2016 at 12:12 am - Reply

    I’m still liking CAT and DOV at these levels. Many industrial plays have been hammered as of late. EMR is another name I have been watching these days. Thanks for sharing your method for picking stocks. There are a few other names I like from the list like TROW and JNJ.

    • Evan February 11, 2016 at 10:14 am - Reply

      Thanks for the input. I have recently bought CAT and EMR, but no DOV yet. EMR didn’t make this month’s cut because their P/B went above 4 compared to an industry average of 2 (not a crazy difference for me to run and sell, but just means there may be better options given my self imposed screen). I think you inspired me to pick up another few shares of CAT today! While I am down since I bought my previous 2 lots, I think 10 years from now Evan will be pumped that I did (or he may be pissed I didn’t buy more).

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