For the past few years every few months I have updated my dividend watch list (last dividend investment portfolio update April 2013). I recently decided since this account is moving up in terms of a priority (i.e. I am depositing more and more money into it) I should update the watch list every month to six weeks. If you are into dividend investing you probably will enjoy these posts, if you aren’t you probably won’t.
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. If anyone knows of a program or site that would do everything I did in my screen I’d really appreciate it if you shared.
I think this particular update should be interesting in the years to come, because today (as well as a few days over the past few weeks) the market as a whole hit new highs. As such, I believe it is more important than ever to find stocks which may be undervalued so if there is a correction maybe the market won’t throw out the baby with the bathwater.
My Dividend Investment Portfolio Screening Criteria
- They have to actually be on the Dividend Champion list – This is a list of stocks that have increased their dividend for the past 25+ years. It is a bit different than the Dividend aristocrat list. The dividend champion list is updated monthly.
- The stock has to have a Price to Earning that is lower than their industry average. New to this month I also eliminated any stock that has a P/E over 30 regardless of it beats the industry average.
- Their Operating Margin has to be in line with the particular stock’s industry average. I want profitable companies!
- 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)
- Price to Book Value Should be Reasonable. Again this changes depending on how many stocks I have left after the first couple of steps. This monthly update I used the number 4.
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.
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.
- 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. This has the unintended consequence of eliminating a lot of well known companies since investors seem to build in a premium.
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. 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 25 years
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. Sometimes I go for 2% sometimes 4%.
Dividend Champion 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. This has an unintended consequence of choosing stocks with a lot of tangible or financial assets on the books.
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
- Air Products & Chem. APD
- AT&T Inc. T
- Atmos Energy ATO
- Bemis Company BMS
- Black Hills Corp. BKH
- Chevron Corp. CVX
- Community Trust Banc. CTBI
- Consolidated Edison ED
- ExxonMobil Corp. XOM
- Johnson & Johnson JNJ
- Leggett & Platt Inc. LEG
- MGE Energy Inc. MGEE
- Northwest Natural Gas NWN
- Piedmont Natural Gas PNY
- Procter & Gamble Co. PG
- Sonoco Products Co. SON
- United Bankshares Inc. UBSI
- Vectren Corp. VVC
- Weyco Group Inc. WEYS
- WGL Holdings Inc. WGL
Unfortunately many of these particular stocks are closer to their 52 week high than their 52 week low. Notwithstanding, I think there may be 1 or 2 I can purchase over the next month or so. For example, it is unlikely I’ll add to my JNJ position because it is 27% away (as of this posting) from their 52 week low and only 1% off from its 52 week high. Meaning I need to hope for a new 52 week high rather than just recapture the high which was already there.