March 2014 Dividend Champion Watch list

After my February 2014 Dividend watch list update I bought:

  • 12 Shares of KO for $456.27

I didn’t sell any shares last, although I may be doing this a bit more when/if I find a particular equity egregiously overvalued as is/was the case with the only sale I made in the past couple years within this particular investment account.  It turns out that my calculations were right.  The stock, MCY, is down a bit.  Actually it is coming very close to getting back on the buy list.  My process will be to take a look at every equity position that is not on the current watch list to see why it didn’t make it.

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 three day weekend ending on the night of March 19, 2014.  The shared spreadsheets below do not update automatically.  I am not sure why I always do this post in the middle of the month.  As such, I won’t be updating until the first week of May (and then the first week thereafter).

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

Back in June 2013  I changed a few variables.  I have included them here just as a reminder to myself (the reminder will be removed in June of 2014).  

  • 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:

Name Symbol
Altria Group Inc. MO
AT&T Inc. T
Atmos Energy ATO
Chevron Corp. CVX
Coca-Cola Company KO
Community Trust Banc. CTBI
Consolidated Edison ED
Eagle Financial Services EFSI
Genuine Parts Co. GPC
HCP Inc. HCP
McDonald’s Corp. MCD
MGE Energy Inc. MGEE
Northwest Natural Gas NWN
Old Republic International ORI
Tompkins Financial Corp. TMP
Wal-Mart Stores Inc. WMT
Arrow Financial Corp. AROW
PSB Holdings Inc. PSBQ
Meredith Corp. MDP
People’s United Financial PBCT
McGrath Rentcorp MGRC
First Financial Corp. THFF

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

2 Responses to March 2014 Dividend Champion Watch list

  1. I like Chevron (CVX) the best on that list. I have started to buy shares of CVX in March for the first time.

    I have also been buying small amounts of WMT and KO from your list using the LOYAL3 monthly investment plan.

    Also looking at buying AT&T at some point to diversify a little into the telecommunications sector.

    I may have missed it somewhere, but do you ever use dividend growth rates or payout ratios in your screens?

    • I don’t use dividend growth rates or payout ratios. I am not sure I like dividend growth as a factor, but I should absolutely be using payout ratios (for sustainability purposes).

      I think I will add that starting next month, John. Thanks!

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