Updating and Tweaking the Parameters of my Dividend Watchlist June 2013

My dividend investment account has gone through one main change since starting it a few years ago.  That change was because of my move from share builder to fidelity, so I needed to buy stocks in bulk rather than put a small amount into fractional shares .  Today, I just make a minor change which I think will change what equities I can invest, but first a review of the account.

This (along with every other) update takes a snapshot of certain metrics.  Ideally, I would revisit these metrics every single time I went to buy stocks, but my investment schedule is erratic based on unpredictable income and these updates take 90mins+ since everything is done by hand.  This snapshot was done the evening of June 13, 2013 (my last update was done May 8th, 2013).

My Dividend Investment Portfolio Screening Criteria

As I mentioned I changed some of the screening criteria starting with this watch list.

  1. They have to pay 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 regardless of industry average.
  3. Their 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 2.5% (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 Starting This Month in Screening for Dividend Growth Opportunities

As mentioned I have recently made some changes.

  • 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 harve provided definitions (all 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 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 2.5%. 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:

1st Source Corp. SRCE
AFLAC Inc. AFL
Air Products & Chem. APD
Altria Group Inc. MO
Atmos Energy ATO
Automatic Data Proc. ADP
Bemis Company BMS
Black Hills Corp. BKH
Chevron Corp. CVX
Coca-Cola Company KO
Community Trust Banc. CTBI
Consolidated Edison ED
Eagle Financial Services EFSI
ExxonMobil Corp. XOM
HCP Inc. HCP
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
Vectren Corp. VVC
Weyco Group Inc. WEYS
WGL Holdings Inc. WGL
Meredith Corp. MDP
PartnerRe Limited PRE
Thomson Reuters Corp. TRI
First Financial Corp. THFF

 

2 Responses to Updating and Tweaking the Parameters of my Dividend Watchlist June 2013

  1. I was wondering early in the post how many stocks were eliminated with each screen. I’m glad you showed that. A good book I read called Trading Rules made me think that waiting for the 52 week low might not be a great idea. The author (an experienced CBOE trader) basically made the point: if I’m trying to buy good companies, what am I telling myself if I wait for the low point….that my little brain knows when the stock is going to turn around? He said that once he admitted that he had no clue where stocks were headed, he put better defensive mechanisms in place and then protected his money more.

    • I look at it as a way to determine whether good companies are out of favor with the market (while their already tested metrics) are still good. I may try to check out that book, thanks for the recommendation!

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