October 2015 Undervalued Dividend Growth Watch List

///October 2015 Undervalued Dividend Growth Watch List

October 2015 Undervalued Dividend Growth Watch List

For the past few years it has been my goal to purchase undervalued stocks that have been paying a growing dividend for the past 20 years.  I use a number of metrics described in detail below.  The main reason I write and share these posts to keep myself accountable to the long term growth and build up of this account.

Dividend Investment Portfolio Activity in September 2015

In September I purchased:

  • 5 Shares of ACE at a price of $100.21/share.

At the time of purchase ACE has a P/E of 11.5, Operating margin of 18.8% (vs 14.9% in industry), a P/B of 1.1 and a yield of 2.63%.

I didn’t sell any positions.

My August 2015 Dividend Income

Dividend Income by Month Sept 2015 Dividend income by Quarter Sept 2015

There seems to be some flucuation in terms of when Fidelity actually credits my account but the trend is staying steady!

Attempting to Find Undervalued Dividend Growth Champions for October 2015

This, along with everyone of these dividend research updates, is a snap shot in time (this one was done on the night of October 14, 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 2.4% (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 this month was 50%.  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 50%+.

Watch List

NameSymbol
ACE LimitedACE
AFLAC Inc.AFL
Atmos EnergyATO
Bemis CompanyBMS
Caterpillar Inc.CAT
Chesapeake Financial SharesCPKF
Community Trust Banc.CTBI
Cullen/Frost BankersCFR
Dover Corp.DOV
Eagle Financial ServicesEFSI
ExxonMobil Corp.XOM
Farmers & Merchants BancorpFMCB
First Financial Corp.THFF
First of Long Island Corp.FLIC
Helmerich & Payne Inc.HP
NextEra EnergyNEE
SJW Corp.SJW
Sonoco Products Co.SON
T. Rowe Price GroupTROW
Target Corp.TGT
Tompkins Financial Corp.TMP
United TechnologiesUTX
Vectren Corp.VVC
Wal-Mart Stores Inc.WMT

By | 2016-01-05T14:37:52+00:00 October 15th, 2015|Dividend Investment Portfolio|2 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

2 Comments

  1. DivHut October 19, 2015 at 2:03 am - Reply

    I am looking at the beaten down industrial names for this month. CAT, EMR and DOV are all on my watch list for October. Also, I still have my eye on the large Canadian banks TD, BNS and RY. Thanks for sharing your potential buys for the month.

    • Evan October 19, 2015 at 9:57 am - Reply

      The day I wrote the post WMT took a BEATING! I figured in 3 to 5 years, I would have kicked myself if I didn’t pick some up.

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