September 2013 Divided Portfolio Watch list

After my August 2013 Dividend Portfolio watch list update I bought:

  • 10 shares Walmart at 73.54 with commissions – $743.35

This (along with every other) update takes a snapshot of certain metrics on a certain date (this one was prepared the night of September 16, 2013).

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 25 20 regardless of industry average.  I made a mistake this past month and eliminated those over 20.  For the next month I’ll be looking at even lower valued companies, not the worst thing in the world.
  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 better).
  5. This monthly update the Dividend Yield should be above 2.25% (changes whenever I update the list depending how many stocks I have left after the first 3 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

A few months ago I changed a few variables.  I have included them here just as a reminder to myself. 

  • 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).
  • Last month I eliminated any stock with a P/E over 30, starting this month and going forward I am elimination any stock that has a P/E over 25 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 the hell 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&P500. 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 25 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 2.25%. As stated, 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 or two I will be looking at the following stocks hoping some come near their 52 week low:

Name Symbol
AFLAC Inc. AFL
Altria Group Inc. MO
Black Hills Corp. BKH
Chevron Corp. CVX
Coca-Cola Company KO
Consolidated Edison ED
Leggett & Platt Inc. LEG
McDonald’s Corp. MCD
MGE Energy Inc. MGEE
Northwest Natural Gas NWN
Procter & Gamble Co. PG
Questar Corp. STR
Sonoco Products Co. SON
Sysco Corp. SYY
Target Corp. TGT
Wal-Mart Stores Inc. WMT
Weyco Group Inc. WEYS
Meredith Corp. MDP

 

Have any history with these companies? Anything you’d like to share?

A few commenters in the past have called me for not looking at free cash flow or a payout ratio in my analysis.  I think they may be correct in terms of understanding sustainability.  I think I may start to add that in the next few months.

3 Responses to September 2013 Divided Portfolio Watch list

  1. Love Altria out of this list. I keep about $10k churning in MO. The stock basically acts like a CD with no time horizon and an incredible yield. Sure the stock moves a little, but the beta is only .44 suggesting incredibly low volatility. I add on any dips, most recently in late August where I got some in the 33′s. Yeah, it’s not the most socially responsible stock so if that holds you back, well then don’t participate.

    • What they do as a company doesn’t bother me all that much. I just picked up some TGT right after I published this post. The reason I picked up TGT vs MO was their relationship to their 52 week high and low.

      As of right this second MO is 15% higher than its 52 week low and 6.42% from its high while TGT is 9% higher than its low and 14% below its high.

      My thought process (which could be flawed but seems to be working) is that there will be less resistance to get the business back to its 52 week high thereby capturing some gains easily. Of course this premise is based on the idea that the underlying company is sound which is what the variables outlined above HOPEFULLY figures out.

  2. I agree that payout ratio is very important, if you plan on holding these for many years to take advantage of the increasing dividends…you want to be sure the company will be able to increase/pay out. I’m a fan of most on your list, and personally own AFL, KO, MCD, PG, and WMT (I started dividend growth investing in my Roth about 3 months ago, beginning with the core purchases). I’m looking at PM and MO now…first analysis has me liking PM a lot more due to its international exposure. Just found your blog, keep up the great work.

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