December 2012 Dividend Champion Watchlist Update

Every few months I like to update the watch list for my Dividend Investment Portfolio (last update was in October of 2012).  As explained in great detail below, I apply various metrics to the Dividend Champion List (defined below) to weed through the list to create a watchlist that I’ll buy lots of over the next few months.  The watch list is based on a snapshot of the metrics, this time the night of December 11, 2012, but the purchase decisions (again only once a month) is based on that day’s price in comparison to the 52 week and low. I think as I am able to invest more and more on a monthly basis these watch lists will be one month old instead of every two to three months.

My Dividend Investment Portfolio

My dividend portfolio is made up of 2 parts:

  • Three ETFs that do not have a fee to purchase and
  • Timed purchases of “the watch list” which is created using metrics to determine if a stock is undervalued

Part 1: Income Based ETFs in my Dividend Investment Portfolio

This is the boring part that is on auto-drive so I have some broader exposure to market sectors. I buy one share of 3 ETFs each month (remember: cost is not an issue as these are free to buy with Fidelity):

  1. DVY – The investment seeks to replicate, net of expenses, the Dow Jones Select Dividend index…The index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. index.
  2. IDV – The investment seeks to replicate, net of expenses, the Dow Jones EPAC Select Dividend index…The index consists of 100 of the highest dividend-yielding securities (excluding REITs) in the Dow Jones World Developed-Ex. U.S. index. The fund is non-diversified.
  3. IYR – The investment seeks to replicate, net of expenses, the Dow Jones U.S. Real Estate index…The index measures the performance of the real estate sector of the U.S. equity market. It includes companies in the following industries: real estate holding and development and real estate investment trusts. The fund is non-diversified.

I am thinking about cutting these broad market index funds out as I have a lot of that broad market exposure happening within my 401(k). While they aren’t dividend based funds, I think at this point they satisfy my fear of missing a total market increase which misses my specific stocks.

Part II: October 2012 Update of the Stock Part of my Dividend Investment Portfolio

The starting point for the watch list is the dividend champion list. Up until about a year ago I was using the dividend aristocrat list, but I then moved to the dividend champions. The main difference between the dividend aristocrat list and the dividend champion list is that to be a member of the latter list a company doesn’t need to be found on the S&P index.

My Dividend Investment Portfolio Screening Criteria

  1. They have to actually be on the Dividend Champion list – Updated monthly
  2. The stock has to have a Price to Earning that is lower than their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be above 2.5% (changes whenever I update the list depending how many stocks I have left after the first 3 steps)
  5. Price to Book Value Should be Reasonable (under 3)

You may notice that some of the stocks aren’t eliminated if they fail a metric test. This is because I don’t want to eliminate a stock that is within a range that eyeball since I am taking a snapshot.

Definitions of Metrics Used for my Dividend Investment Portfolio

All definitions are 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&P500.
  • 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.”
  • 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”
  • 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 Champion Price to Earnings by Stock’s Industry

The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average

Dividend Champion Operating Margin by Stock’s Industry

Next I eliminated those stocks whose operating margin was not better than its peers in the industry (or only marginally better).

Dividend Champion Dividend 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%. As stated, this is a moving target depending on how many stocks I have left to choose from.

Dividend Aristocrat Price to Book

Lastly, I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued.

Remaining Dividend Aristocrats to Build Part II of My Dividend Investment Portfolio

The remaining stocks that I will be investing for the next couple months are:

  • 3M Company    MMM
  • AFLAC Inc.    AFL
  • Air Products & Chem.    APD
  • Atmos Energy    ATO
  • Black Hills Corp.    BKH
  • Chevron Corp.    CVX
  • Commerce Bancshares    CBSH
  • Community Trust Banc.    CTBI
  • Consolidated Edison    ED
  • ExxonMobil Corp.    XOM
  • Genuine Parts Co.    GPC
  • Leggett & Platt Inc.    LEG
  • MGE Energy Inc.    MGEE
  • Mine Safety Appliances    MSA
  • National Fuel Gas    NFG
  • Northwest Natural Gas    NWN
  • Piedmont Natural Gas    PNY
  • Questar Corp.    STR
  • RPM International Inc.    RPM
  • Sonoco Products Co.    SON
  • Sysco Corp.    SYY
  • Vectren Corp.    VVC
  • Walgreen Company    WAG
  • Weyco Group Inc.    WEYS
  • WGL Holdings Inc.    WGL

I have been investing with $300 – $500 lots but with the home buying and selling coming to a close next month I will be able to slowly increase my investment amount from $500 to $1,000 lots.  I spend a lot of time on these portfolio updates, but I am not providing investment advice rather I want to hear what EVERYONE thinks about it!

One Response to December 2012 Dividend Champion Watchlist Update

  1. I notice that a lot of those listed are in the energy sector. Do you think that that’s a coincidence or that perhaps the entire energy sector is undervalued? Also, do you have any concerns about having what looks to be a large percentage of your investments in one sector? I’m just starting to venture outside of mutual funds, but I think that having so many energy sector stocks would make me nervous.

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