January 2014 Dividend Watch List Update

After my December 2013 Dividend Watchlist update I bought:

  • 11 Shares of TGT for $691.27 with commissions

Last month was the first time I ever sold, even a part, of a position that wasn’t due to a dividend cut (within this account obviously).  I am going to keep my eye out for anything else that looks overvalued pursuant to P/E, Operating Margin, etc.  I try to keep the “news” out of it, although, that may be a mistake.

As I have mentioned in the past this (along with every other) update takes a snapshot of certain metrics on a certain date.  This update was prepared on the night of January 12, 2014. The shared spreadsheets below do not update automatically.

My Dividend Investment Portfolio Screening Criteria

  1. The company has paid increasing dividends for the past 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).

You may notice that some of the stocks aren’t eliminated if they barely 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.

Tweaks Which occurred in June of 2013

A few months ago I changed a few variables.  I have included them here just as a reminder to myself.  

  • For the past few years I have focused on the the Dividend Champion list (before that I used the the Dividend aristocrat list). The dividend champion list is updated monthly. Starting this month I have lowered the amount of years that a company has to have paid increasing dividends to 20 (from 25).
  • I eliminated any stock with a P/E over 30, then I lowered it to 25 and now I am at 20 regardless of it beats the industry average.
  • In the past P/B was “reasonable” but as lot of commenters pointed out this eliminates companies with naturally higher P/B. I should have listened to my readers earlier! As such, I now use the industry average for all stocks with a P/B over 4.
  • Yield is now my last criteria (as opposed to P/B).

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.
  • 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”

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.

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%.

Remaining Dividend Aristocrats that I hope are near their 52 week low

For the next month I will be looking at the following stocks hoping some come near their 52 week low:

Altria Group Inc. MO
Atmos Energy ATO
Black Hills Corp. BKH
Chevron Corp. CVX
Community Trust Banc. CTBI
Consolidated Edison ED
Eagle Financial Services EFSI
Genuine Parts Co. GPC
HCP Inc. HCP
Leggett & Platt Inc. LEG
McDonald’s Corp. MCD
MGE Energy Inc. MGEE
Northwest Natural Gas NWN
Procter & Gamble Co. PG
Target Corp. TGT
Tompkins Financial Corp. TMP
First Financial Corp. THFF
Arrow Financial Corp. AROW
Meredith Corp. MDP
PSB Holdings Inc. PSBQ

 

Any feelings on these companies?  Any that you hate? Any ideas on how I sift through the metrics?

2 Responses to January 2014 Dividend Watch List Update

  1. No real qualms or questions about the companies you have listed. I don’t think I hate any of them, at least not from the perspective of profitability/operational competency.
    My only question is around your requirement for a company to have increasing dividends for the last 20 years. I understand what you’re looking for here, but do you find the 20 years timeframe to be restrictive sometimes?

    • Absolutely, but it allows me to start my research from the 1,500 or 2,000 stocks in the U.S. down to about 150. If you check out the dividend champion spreadsheet there are also dividend contenders (10 to 24 years of dividend increases) and dividend challengers (5 to 9 years of dividend increases).

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