Every 60 days or so I like to update the watch list for my Dividend Investment Portfolio and since my last update was in April of 2012 I knew I had to get on it! I create these posts to
force push myself to create a watch list of dividend investment stocks based primarily off those in the Dividend Champion List.The watch list is based on a snapshot of data, this time on July 11, 2012. I know making buy decisions based on old data is not the most effective way, but the research that goes into these posts takes me hours and as such I can’t just update it every few weeks.
My Dividend Investment Portfolio
My dividend portfolio is made up of 2 parts:
- Three ETFs that cost nothing to buy through my broker Fidelity and
- Timed purchases of “the watch list” which is created using metrics to determine if a stock is undervalued
Part 1: Income 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 in Fidelity):
- 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.
- 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.
- 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.
In the past I had stated, “I have not and will continue not to reinvest the dividends in these ETFs” however I have since changed my mind on this topic. Everything in this account is now set up to auto reinvest dividends.
I changed my mind on this topic, after reading too many articles on how much gain in a mutual or index fund is based on the reinvestment of dividends. I figured it was such a small part of my portfolio why not just let it be.
Part II: April 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 8 months 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
- They have to actually be on the Dividend Champion list – Updated monthly
- The stock has to have a Price to Earning that is lower than their industry average
- Their Operating Margin has to be in line with the particular stock’s industry average
- Dividend Yield should be above 2%
- 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 1 numeral off from any of the metrics 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%. 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:
- Air Products & Chem
- Archer Daniels Midland
- Chevron Corp
- Chevron Corp
- Community Trust Banc.
- Illinois Tool Works
- Leggett & Platt Inc.
- Medtronic Inc.
- Mercury General Corp.
- National Fuel Gas
- Target Corp.
- Tompkins Financial Corp.
- United Bankshares Inc.
- Vectren Corp.
- Walgreen Company
- Weyco Group Inc.
I will continue my $300 – $500 lots at or near short term dips in the stock which I keep an eyes on using my Google Docs as my Investment Tool.
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!