November 2015 Undervalued Dividend Growth Watch List

///November 2015 Undervalued Dividend Growth Watch List

November 2015 Undervalued Dividend Growth Watch List

Every month for the past few years, I have taken a couple of hours to search through a ton of data to attempt to find undervalued stocks that have raised their dividend for at least 20 years.  I then track any buys/sells, as well as my dividend income, and share with the world to see.  While this account is very small it is easily the favorite part of my investing.  While I have had some quick pops, this is meant to be a slow and steady type of account – hopefully in 15 or so years, a 50 year old Evan will start taking income from it.

Dividend Investment Portfolio Activity in October 2015

I was way more active in October than I usually am.  I sold a good amount of shares (outlined below) and used the proceeds to decrease debt – I hate doing this, but the number was getting too high for my comfort zone.

In October I purchased:

  • 12 Shares of Walmart at a cost basis of $59.91/share

In October I sold my full position in:

  • HCP – I initiated my position in HCP in June of 2013, and watched it stay flat (and negative) the whole time.  While it passed my metrics below their earnings took a hit quarter after quarter…as of today the P/E is in the 60s! Which, for me, is nauseating for this account.  In the end I lost a few hundred dollars
  • IShares Select Dividend – DVY – This ETF, as well as the other one below, were a hold lover from YEARS ago when I started this account with sharebuilder.  The last purchase I made (minus dividend reinvestments) was in 2012! Notwithstanding, I’ll take my 30% or so (not impressive when you divided that by the 4 years I’ve been involved).
  • IShares International Select Dividend – IDV – See above.
  • MCY – This is an insurance company whose earnings suffered so the stock followed suit.  MCY was actually the first position I sold in this account way back in 2013 since the metrics on it were crazy! Even today it was at a P/E of 92! and since I was trying to create liquidity it was time to get rid of something that wasn’t a growth stock with a P/E of 92
  • NFG – Another long time hold with my first and only shares being purchased in May of 2012! Just held it and reinvested dividends.

I hate selling.  I figure even the shares above, given enough years would figure it out, but I wanted liquidity.

My October 2015 Dividend Income

Dividend Income October 2015 - By Month
Dividend Income October 2015 - By Quarter

Not the growth I’d like, but considering I just raided the account how can I complain?

Attempting to Find Undervalued Dividend Champions for November 2015

This, along with everyone of these dividend research updates, is a snap shot in time (this one was done half on the night of November 15, 2015 and half ont he morning of November 16, 2015) so please don’t use my data as anything but a starting point for your own research.  I use the metrics below to get to a “watch list” which I use to try and purchase equities closer to their 52 week low.

My Dividend Investment Portfolio Screening Criteria

All data is taken manually from Morningstar:

  1. The company has paid increasing dividends for at least 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).
  6. Dividend Payout Ratio – It took me a long time to add this to my screen but basically I weed out any companies paying over 60% to shareholders.  Couple reasons.  The main one would be sustainability, but also, I do want growth in a company and if all dollars are going out it is likely to hurt the company in the long run.

Since this is a snapshot I am not that strict since I am well aware that if the underlying company opens a tenth of a percent the other way it could pass a metric.

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 (20+ years but less than 25).
  • 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 158 equities to about 50!

 

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%

 

Fifth Stock Screen: Payout Ratio

Next, I eliminated those equities whose payout ratio was 60%+.

Watch List

Arrow Financial Corp.AROW
Atmos EnergyATO
Chesapeake Financial SharesCPKF
Community Trust Banc.CTBI
Conn. Water ServiceCTWS
Cullen/Frost BankersCFR
Dover Corp.DOV
Eagle Financial ServicesEFSI
Emerson ElectricEMR
First Financial Corp.THFF
Helmerich & Payne Inc.HP
MDU ResourcesMDU
MSA Safety Inc.MSA
NextEra EnergyNEE
Sonoco Products Co.SON
T. Rowe Price GroupTROW
Target Corp.TGT
Thomson Reuters Corp.TRI
Tompkins Financial Corp.TMP
United TechnologiesUTX
Wal-Mart Stores Inc.WMT
By | 2015-11-18T20:18:37+00:00 November 16th, 2015|Dividend Investment Portfolio|4 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

4 Comments

  1. Kelly November 25, 2015 at 11:48 am - Reply

    What do you think of Tompkins? They show up for me to and have for a long time. Their p/e is not bad they seem like a steady choice but I do not see anyone buying or talking about them. Is it because they are financial? Also I have been thinking about reits HCP or OHI. I have been seeing a lot of buys for HCP but the growth for OHI seems much better.
    Tx

    • Evan December 2, 2015 at 10:32 am - Reply

      Kelly,

      The reason I never purchase any is because it is consistently near the 52 week high (while being 22% off the lows). One of the flaws with my “system” (and I am using that word loosely) is that I try to build in safety rather than look for major growth opportunity. So since, they are are at the height of their 52 week curve I usually back off purchasing until it drops.

      Not sure I explained that well – does that make sense?

  2. Kelly December 2, 2015 at 8:50 pm - Reply

    Thank you Evan,
    Yes that’s makes perfect sense I can’t believe I didn’t think of that. I was so occupied with thinking about how long I have seen it make it thru the filters.
    I really appreciate your blog. I learn something new, a lot of somethings all the time.

    • Evan December 2, 2015 at 9:38 pm - Reply

      That actually may be one of my shortfalls which is why I say the post should just be a guideline. Maybe the stock is set to blast past the 52 week high? I’ll never know with my system.

Leave A Comment