Updating My Value Dividend Portfolio

Updating My Value Dividend Portfolio

One of my favorite parts of my financial “empire” is my Dividend Portfolio (a/k/a Perpetual Income Machine).  While it is not big by any stretch of the imagination worth only a couple grand, I have been throwing more and more money at it per month so I feel that it deserves more attention.  Actually, I don’t even think I have an empire yet, maybe just one of those straw huts.  Prior to my update in December of 2011, I updated the account only once before at the 6 month mark, but as I just stated I am going to update the account once every 3 months.

Creating my Perpetual Income Machine

My goal is to find undervalued stocks only within the dividend aristocrat index.  The reason I keep my investing to the dividend aristocrats is because of what the index represents.  The S&P Dividend Aristocrats index are,

large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

Since I am first and foremost creating a future income stream (which is also why the portfolio is not in a qualified-retirement account) I want stable companies that have paid a consistent stream of income (i.e. a quarter century of increasing dividends will do it!).  The criteria I used to build this particular portfolio:

  1. They have to actually be on the Aristocrat List
  2. The stock has to have a Price to Earning that is lower than or equal to their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be between 2% and 5%
  5. Price to Book Value Should be Reasonable

Some quick definitions

  • Dividend Aristocrats are those dividend paying American companies that have increased their dividend for the past 25 years.
  • 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.

Over the past year with 2 updates my portfolio looks like this:

  • SDY – S&P Dividend ETF – 19.1%
  • CB – Chubb Corp – 18.8%
  • CTL – CenturyTel – 18.6%
  • LEG – Leggett & Platt – 13.3%
  • SWK – Stanley Black & Decker – 7.2% *(Not currently being added to because it failed the last update)*
  • VFC – V.F. Corp – 7%
  • PBI – Pitney Bowes – 6.7% *(Not currently being added to because it failed the last update)*
  • MMM – 3M – 6.7%
  • BDMXX – Money market – 2.7% (used to hold cash before next automatic investment date)

I have absolutely no love for any of the companies, I actually don’t even remember what they all do.  For me, with this particular portfolio, it is all about the numbers that I am about to go through.  The only time I will sell a holding is if they get kicked out of the index like LLY was in December.

Dividend Aristocrat P/E Elimination

First, I eliminated those stocks whose Price to Earnings Ratio was not better than their industry average.

 

Dividend Aristocrat Operating Margin

Second, I eliminated those stocks whose Operating Margins were not better than their industry average.

 

Dividend Aristocrat Dividend Yield

While I am not chasing yields I would like at least a 2.0% yield, so I eliminated those stocks who had a less than 2.0% dividend yield.

 

Dividend Aristocrat Book Value

My last criteria was that their book value be under 4.5.

 

Which Dividend Aristocrat Stocks Should I Invest In?

It took me a long time to compile the data and hand deselect which stocks I am interested in, however, after researching these 4 criteria I ended up with the following 15 options:

 

 

Updating the portfolio has nothing to do with the past, only moving forward.  In this update I have decided to move forward with:

  1. MMM – While their book value is a little high for me, they have an operating margin that is 3 times their industry.
  2. AFL – I did it for the duck.  Seriously though their P/E is half of that of the Financial Services Industry average and its operating margin is 5 times their industry.
  3. CTL – While their P/E is closer to their industry than I would prefer the rest of their stats are stellar.
  4. CB – Their operating margins are almost  double their industry average and their book value is only 1.1
  5. LEG – Their P/E is really high at 20.5 but it is more than half the industry average, and while their operating margin is low it is still double their industry. Plus it has a sweet 4.75% yield

As always, in addition to these 5 stocks I will be picking up the Dividend Aristocrat ETF just so I can hedge my bets a bit (i.e. if I chose wrong).  This is simply an experiment and nothing here should be construed as financial advice.

 

These are unusually lengthy posts that take me forever to compile so I would love some feedback

17 Responses to Updating My Value Dividend Portfolio

  1. It doesn’t surprise me to see that after going through your criteria that it is the insurers that look best. Chubb is an excellent company at this P/B, and returns so well…I still don’t know why investors are avoiding it.

    I think they see the P&C market as an almost pure play on leveraged fixed income, but at these valuations I think it’s one of the most attractive industries.

  2. Great post, keep these coming.

    LEG looks interesting. AFL is something I am watching.

    The Google published docs are kind of annoying (for me anyway) – they show like 15 columns with nothing in them after the columns that actually have data.

    CTL worries me (industry) and I guess lots of other investors which gives it a very attractive 7.5% yield. Certainly has potential for a very nice return if you can assure yourself their future cash flow can sustain a dividend even close to that level.

    • Thanks John! I am so glad someone likes these posts…

      There may be a better way to show everything rather than iframe google docs sorry about that.

      CTL is a scary industry, but I think they are expanding into other industries besides old school copper wire phone systems.

  3. Just like Jenna, that’s for setting the groundwork for when I start to do some serious analysis on what to buy :)

    I was thinking about buying ABT, but I think I’ll hold off since you just red highlighted it :)

    • No No No! Do what you think is right for your lunch experiment lol. I just highlighted because at the current time the P/E is 4 points higher than the industry average.

  4. Very nice analysis on dividend investing. Have you calculated what your average yield is from these stocks?
    Also, is this done on a DRIP program or are you buying 100-share lots?

    • What do you mean 100-share lots? Some of these stocks are valued at $40 a share…which would be a $4,000 investment in one stock, montly.

      I am dollar cost averaging at $150 a week or bi-weekly evenly spread among my choices.

  5. This looks like a nice start to a dividend portfolio. Once I get my debt eliminated, I’d like to do more research into dividend investing – it seems like a nice way to increase returns.

    • I am working on this while destroying my debt. If you don’t have CC debt you should think about doing both at the same time!

  6. You need some tobacco stocks! That is, if you can get past the ethical investing part. I did. Great returns, great yields, low volatility.

    • Ethical? Whether I own 1 single share of a tobacco company makes no difference in the world. That’s how I would get over the ethical issues.

      What I always find interesting fascinating are the hardcore Christian index investors. I wonder if they realize that they own abortion and pro-homosexual rights stocks.

      BTW, the reason I don’t have any is that they must have not been in the original Aristocrat list.

  7. Not sure where you get your starting list to filter from but hopefully with several companies moving their January dividends forward into late December doesn’t mess any databases up to keep track of dividend increase streaks. Just something to be aware of come this time next year. The Dividend Aristocrats are definitely a great bunch of companies. I just wish I owned more of them.

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