I recently explained that I want to set up a dividend paying portfolio. In that post I went over how I planned on starting to create this perpetual passive income account. So this is basically my thought process on how to narrow down 4 or 5 stocks to create the dividend portfolio, which I am going to name “Perpetual Income Machine.” I am going to start very small, and as I get more comfortable I will increase the weekly/monthly contributions.
Dividend Aristocrats
The first thing I did was pull the Standard and Poors Dividend Aristocrats list. The S&P Dividend Aristocrats are blue chip stocks that have paid increasing dividends for the the past quarter century. Luckily, this took from a list of thousands of dividend paying stocks in the United States to a much more manageable 43.
Next I researched some statistics I thought were key to start cutting down the list. These include Price to Earnings of the company, Price to Earnings average of the industry, the Profit Margin and the average Profit Margin of the Industry (by the way I put these in by hand so that took me forever lol).
I was able to cut down a few off that list just because I didn’t like how their P/E and Profit Margin compared to industry averages. So I ended up with this list:
Next I looked to Yield. I am not yield chasing, by any means, but I figured after that some of my remaining choices should have been lower than their Aristocrat peers. With the exception of one or two, I was wrong.
With the list still too big, Matt SF from Steadfast Finances, told me to take a look at the Price to Book Value. The P/B value is defined by investopedia as,
What Does Price-To-Book Ratio – P/B Ratio Mean?
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.Also known as the “price-equity ratio”.
Calculated as: Stock Price/Total Asset – Intangiable Assets and Liabilities
Investopedia explains Price-To-Book Ratio – P/B Ratio
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.This ratio also gives some idea of whether you’re paying too much for what would be left if the company went bankrupt immediately.
Matt SF explained that the lower the ratio the better. I was really feeling PBI until their P/B came out to just under 400, when I was shooting for 1ish!
With all the research I came up with Three Stocks that I think I am going to move forward on they are:
- CTL – A P/E ratio of 6 points lower than industry average; their profit margin is almost double than industry average; a dividend yield of 8%; and a P/B of 1.12
- CB – A P/E that is on par with the industry; A profit margin that is about 25% higher than the industry; yield of 2.8%; and a P/B of 1.13.
- LLY – P/E that is under the industry; the profit margin DESTROYS the industry (29.17% vs 1.69%!); healthy yield of 5.8%, but the P/B is a little high at 3.95
I’d like a fourth investment for this experiment.
So, I ask you what’s wrong with my analysis? Is it good for a first timer? What should be my fourth pick?
Evan
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Now I see what you were doing with the Google Docs! Imagine my frustration when every time a person signs up I am forced to adjust the height and width to make it fit on the page!
That’s why you are a better blogger than I!
Funny, I was looking at PBI too,(the yield drew me in) but that P/B and the fact that mail is so 1980s scared me off.
I like your choices, I have T, CINF, KFT & MO in my small portfolio, but like you I’m looking to expand. Thanks for speeding up my research
If I were you I’d throw in one of the consumer staple/discretionary since you don’t have anything in that category yet. Maybe Stanley Works – what’s better than making tools?
I am glad I can help that freaking research took me a long time so if ONE person gets helped it might be worth it (might) lol. The only reason it took me a while was because it was all entered by hand.
I like the idea of adding that one more category. I was thinking KO because if Buffet Likes Coke who the hell am I to say no, but the problem was it looks like they sold some of their North American divisions to Coke Enterprise…to be honest I have no idea what that means but it seems to be bad.
Stanley Works may be a great option. Thanks
Excellent process of elimination Evan!
Mind if I ask at what value did you set your Price to Book ratio? I usually set mine to look for companies with a P/B <= 1.5, and if that's not tight enough, I'll readjust to <= 1.0.
Just curious, but why did you only select from the Aristocrats? Why not just search from the whole market, where you would have found big div players like CEL, NLY, CPNO, BPT, KMP, etc.
I didn’t set my Price to Book Ratio – I started with the Aristocrats and then listed all their P/B.
The reason I started with the Aristocrats is because I liked the definition to start with, i.e. they have been providing increasing dividends since I was 3 years old.
I am not saying I am right or wrong, it is just that this is a first for me, so why not start with safety.
You know, I was just perusing your spreadsheet some more and realized a lot of the stocks on here don’t even beat an ETF like SDY on yield and P/E ratio.
I would have a really hard time investing in a single stock where dividends are the main draw if it can’t even beat the index. Not to mention lack of diversification vs. holding the ETF.
Generally, those are the main benefits of investing in an ETF.
Normally, I am all about index fund investing, but this experiment was a little different.
PBI with a 300+ P/B ratio seems crazy!
For individual stocks this is a good place to start, being aristocrats the yield is probably fairly safe. However, there are much better yielding stocks that could provide greater ROI. The only difference is that you would have to monitor them a little more.
I played in individual stock for about a year and half and still hold a dozen or so. It is a lot of work and I learned it takes a lot more than a few statistics. Look at Toyota right now, (I don’t own it) but it was a great stock and one that I was watching last year. Now I am glad I didn’t buy! All the math in the world doesn’t matter if one thing goes wrong or the CEO leaves.
After all my work, I ended up going with Kevin’s idea. I still watch and try to learn more but 75% of my money is in SPY.
I think I might add SDY (the aristocrats not just the 500 general) to the mix as like a net to catch the upswing in the other 39 or stocks I am not going to pick up.
[...] Journal to Millions’s post “Picking Dividend Aristocrat Stocks” – is perfecting his google apps spreadsheet skills so that he can picking the [...]
Or, you can just close your eyes and pick things at random and make $$!
I wish! I bet it has something to do with my ying and yang being unaligned
Hi Evan,
Just out of curiosity.
I might have missed this, but is the dividend yield based on last year’s dividend?
If that’s the case, how reliable is the number for future dividend (since that’s what you’re after)? Do you use dividend stability number as well?
There’s a good chance that the earning will be better this year, but still.
I like your elimination process. Simple and logical.
Current dividend yield from finance.google.com
I am not sure what the dividend stability number is? The 43 I started with, have issued an increasing dividend for the past 25 years, so I am going to assume they are stable, but I’d like you to explain what dividend stability number is.
Okay, I just copy + paste it from my broker’s website.
“This calculation is designed to assess the probability of a future cut in dividends based on the company’s 10-year track record. It is based on two factors: (1) The number of times in the last 10 years (or less, if data is not available), in which the annual dividend has been cut. This percentage is then multiplied by the average percentage size of the cut. The higher the percentage, the more stable the dividend. A dividend stability of 100 percent indicates no dividend cuts have been recorded.”
I’m not sure when the companies in US announce their future dividend, but in my understanding, Google (and other financial broker websites) would base it on last year’s dividend until the company makes their announcement, which is a couple of months before the XD date.
Anyway, just a thought, since you rely heavily on dividend yield.
One other thing to take a look at when you’re searching for yield is the dividend payout ratio. How much of a company’s earnings do they pay out in dividends. Any more than 50-60% and that would give me pause, I really like to see 40%.
If you’re still looking for a consumer goods stock you can’t go wrong with PG or KMB – PG has paid a dividend since 1891 and KMB since 1935
“One other thing to take a look at when you’re searching for yield is the dividend payout ratio. How much of a company’s earnings do they pay out in dividends. Any more than 50-60% and that would give me pause, I really like to see 40%.”
- I didn’t take that into account but that seems really impotant, also!
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From today PBI Market Cap. 4.57 Bil
As P/B is almost 400 base on your file than it will means the book value for PBI is mearly 12 million give or take.
I can’t belive this is really their book value.
what am I missing ? or is this one of those cases where the formula just mess up and make no sense.
BW
P.S. great work !
P.S.S. I agree with the former post talking about how much the dividend from the earning, take VZ maybe they will be ok but today they pay more than they earn, which means they might need to reduce their payment if thing don’t change quickly.
so while their stock might go way up, from dividend point of view it look risky.
Berty,
Thanks for stopping by! I have updated my portfolio since this post. You can check out all the entries:
http://www.myjourneytomillions.com/articles/tag/perpetual-income-machine/
[...] s1); })(); ShareEmailOne of my favorite monetary accomplishments this year is creating a dividend portfolio. When I created that portfolio my first step was to use the dividend aristocrat index, which [...]
Excellant article and how does one
review as a full page re your google doc’s
Thank you / Bill
Bill I am glad you like the post!
You can check out the main google doc at:
https://spreadsheets.google.com/pub?key=0AgFgodcx6dRcdFRHQU95SVBCZkFDS2FLUlpQdHZrMnc&hl=en&output=html
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