July 2014 Dividend Research

Every month for the past two years I share my process to screen for undervalued dividend paying stocks that have increased their annual dividend payment for 20 or more years.  Last month I wrote,

Considering the market has been hitting new intra-day highs almost on a weekly basis I was afraid that I was going to find nothing undervalued, however, I have watched a bull market for the past few years and have always seemed to find diamonds in the rough (granted it may take years for those diamonds to actually shine since I try to buy near 52 week lows – luckily I plan on having this account for decades not years).

Well who knew that with another month in the books the S&P would be up another 1.8% or so!  Despite the market being on a tear I purchased:

  • 5 Shares of CVX for a total purchase of $633.15

In addition, I received $155.68 in dividends which approximately 50% year over year:

Dividend Income

As I have mentioned in the past this (along with every other) update takes a snapshot of certain metrics on a certain date.  The majority of this update was prepared on the night of July 6 and the rest was created on July 7.  The shared spreadsheet below does not update automatically.

Since Google has updated Sheets, their spreadsheet tool, I can’t seem to embed a singular tab so below is the entire spreadsheet (please let me know if you know how!):

 

It would probably be easier just to open up the spreadsheet in google sheets - July 2014 Dividend Research.

My Dividend Investment Portfolio Screening Criteria – INCLUDING NEW CRITERIA THIS MONTH

  1. The company has paid increasing dividends for at least 20 years – 155 entries this month!
  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. BRAND NEW – Dividend Payout Ratio - After a few commenters brought it to my attention that I was missing this important metric given my goals I have added it.  Yes, it took me this long to actually implement it.  Nevertheless, thank you to those readers.

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.

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”
  • 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 brought me down from 154 equities to 47!  Unsurprisingly that was an even more extreme elimination than the previous month. 

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

This brought me down from 47 to 34.

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.

This brought me down from 34 to 30.

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%

This brought me down from 30 to 19!

Since yield in of itself is derived from price this is another indication of a hot market (not that we needed one).

Fifth Stock Screen: Payout Ratio

Brand new this month I eliminated those equities whose payout ratio was 60%+.  I am not sure if this was a good level but from the articles that I have read indicate that is the top end for most stocks.  I would love some input on the topic.

This brought me down from 19 to 15.

My Dividend Watch List for July 2014

Chevron Corp. CVX
Community Trust Banc. CTBI
ExxonMobil Corp. XOM
First Financial Corp. THFF
Genuine Parts Co. GPC
Johnson & Johnson JNJ
McDonald’s Corp. MCD
MGE Energy Inc. MGEE
Target Corp. TGT
Tompkins Financial Corp. TMP
Wal-Mart Stores Inc. WMT
Arrow Financial Corp. AROW
NextEra Energy NEE
Southside Bancshares SBSI

*I removed EFSI since it has an average daily volume of 2,200 shares.

 

I now compare these companies to their 52 week high/low.  I like buying companies closer to its 52 week low to capture easy upside, however, finding an undervalued company is goal number one.

6 Responses to July 2014 Dividend Research

    • None yet!

      I create these posts in advance of my monthly purchase. So last month I created the post on 6/4 and then on 6/5 or 6/6 purchased the CVX lot. I’ll go to the watchlist (6th or 7th tab in the spreadsheet) and take a broad look at the inputs and 52 week high/low.

    • I figure if I am buying anything worth $500 to $750 I do my research why wouldn’t I here? Especially since unlike material items the asset may be with me for years.

    • JNJ is a fantastic company. I haven’t purchased a lot since 2011 (looks like 4 shares for $68.26 a share – This was very early on in the history of this account). Looks like up about 54% and own 5.6 shares (LOVE FREE DIVIDEND REINVESTMENTS).

      So a small holding but still like it!

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