October 2012 Dividend Champion Watchlist Update

My Dividend Fund is literally my favorite piece of my financial empire 1650 peasant town.  As such, every few months I like to update the watch list for my Dividend Investment Portfolio (last update was in July of 2012) rather than a set it and forget it for a few years like I do with my 401(k).  The watch list is used to purchase a lot of shares once a month (usually a few hundred dollars worth) The watch list is based on a snapshot of the metrics, this time on October 10, 2012, but the purchase decisions (again only once a month) is based on that day’s price in comparison to the 52 week and low.

I should mention that sometime this year I made the decision to reinvest all dividends into their respective equity.  My reasoning in the past was that I should get to choose where the cash is going, i.e. I was reinvesting at a point where I have already deemed the metrics unfit for current investing.  The reason I changed was I found that I was investing the same amount per month so I was just putting less new money into the account PLUS my dividend stream is tiny right now (like a couple hundred bucks a year tiny) so in the end why add more work for myself.

My Dividend Investment Portfolio

My dividend portfolio is made up of 2 parts:

  • Three ETFs that do not have a fee to purchase 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 to buy with Fidelity):

  1. 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.
  2. 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.
  3. 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.

Part II: October 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 a year 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

  1. They have to actually be on the Dividend Champion list – Updated monthly
  2. The stock has to have a Price to Earning that is lower than their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be above 2.5% (changes whenever I update the list depending how many stocks I have left after the first 3 steps)
  5. 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 a range that eyeball 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 2.5%. 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:

  • 1st Source Corp.    SRCE
  • AFLAC Inc.    AFL
  • Air Products & Chem.    APD
  • American States Water    AWR
  • Bemis Company    BMS
  • Chevron Corp.    CVX
  • Community Trust Banc.    CTBI
  • Consolidated Edison    ED
  • Diebold Inc.    DBD
  • ExxonMobil Corp.    XOM
  • Illinois Tool Works    ITW
  • MGE Energy Inc.    MGEE
  • Mine Safety Appliances    MSA
  • National Fuel Gas    NFG
  • Piedmont Natural Gas    PNY
  • Sonoco Products Co.    SON
  • United Bankshares Inc.    UBSI
  • Vectren Corp.    VVC
  • Walgreen Company    WAG
  • Weyco Group Inc.    WEYS

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!

10 Responses to October 2012 Dividend Champion Watchlist Update

  1. I am just getting back into investing into stocks and need to add a dividend stock or two into my mix. Are you reinvesting your dividends or pulling it out? I also was thinking about going with more P2P lending as the interest seems to be a little better.

    • I am reinvesting all my dividends. At first I wasn’t and then realized it was a mistake. I really like the idea of P2P Lending but my job prevents me from being involved in it.

    • The list is just purely a watch list based on nothing but numbers. So maybe that means energy stocks are under valued right now? When I actually buy I don’t buy all 20 – just a single company. The portfolio hasn’t really become weighted in energy

  2. With such a small dividend stream, I would personally let the money accrue and then add it all to a regular investment every quarter. This minimizes tax lots which can be a pain to deal with on the back end. This way you’re creating zero extra tax lots vs. creating 4 x # of stocks extra tax lots each year.

    Of course, with these new fangled things called computers, it’s probably not a huge deal. But I prefer a neat and tidy portfolio over one that requires extra bookkeeping. :-)

    • Makes a lot of sense Michael, but knowing myself I just wouldn’t do it. This way of doing it FORCES me to purchase equities monthly and pay myself back (if I use the margin account). The tax lots is really REALLY easy with fidelity so not a huge deal.

  3. Hey Evan, you’re investing in all 20 of those stocks? I remember when you started the perpetual income machine it was more like 4 or 5 at a time.

    A few hundred a month in dividends already isn’t bad since it’s only been a couple years and you have a long time left to invest.

    • It used to be 4 or 5 at a time when I was with sharebuilder since they made it easy. When I moved to Fidelity (had to b/c of my job) I moved it to just one equity purchase a month due to the fees. So I am not investing in all 20 per month, rather just use this as my watch list for the next few months.

      I do NOT have a few hundreds a month in dividends YET…It is growing but this is one slow ass process LOL

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