Updating the Perpetual Income Machine

After giving you all the facts about how my dividend portfolio has done over the past 6 months, I figured it was time to update my spreadsheets to determine whether I am sticking with my 3 dividend producing stocks and the catch-all ETF.

My Current Dividend Portfolio

I took a four step approach to create my dividend portfolio.

  1. First I listed all the Dividend Aristocrats.
  2. Then I cut all those stocks whose P/E ration was either in line, equal or worse as compared to the industry standard.
  3. Next I looked at yield and
  4. Lastly, I looked at Price to Book.

I ended up with 4 stocks that I wanted to pursue,

  • LLY – Lilly (Eli) & Co
  • CTL – Centurytel Inc
  • CB – Chubb Corp
  • SWK – Stanley Black and Decker

I also picked up the Index-ETF just so I could have a small piece of all 44 Dividend Aristocrats.  So my plan is to repeat those four steps.  I will drop/add as necessary but I am going to keep investing in either 4 or 5 stocks (plus the etf).  Even if I decide not to continue investing in a certain stock, I won’t be selling my position.

Stocks on the Dividend Aristocrat List

S&P provides us with the S&P Dividend Aristocrats Index.

The S&P 500® Dividend Aristocrats index measures the performance of 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.

This first step narrowed the thousands of stocks to 43.

Price to Earnings for Dividend Aristocrat List

Next I looked into comparing P/Es

Right off the bat, I eliminated those stocks in Red.  They were eliminated because I didn’t like their P/E and/or their operating margin is too small as compared to its peers.

The non-highlighted ones, didn’t grab my attention and considering I have enough ones that do, I figured I would move forward.  Speaking of those that caught my attention, they are highlighted in Blue and MUST be further researched.  If you notice their P/Es are substantially lower then their industry standard or they have an operating margin which is higher than its peers.

As you can see 3 of my 4 previous picks are still blue!  But one is red! I will stop investing in SWK.

Comparing Dividend Yield

Next up is comparing the dividend yield of all my choices which are left.  While I am not chasing yields, per se, it would be nice if the yield matched or exceeded those choices which are left.

This only eliminates one stock, BCR, with a yield less than 1%.

Price to Book

Price to Book should be near one.

This metric allowed me to eliminate 3 more choices.

My Current Dividend Producing Portfolio

  • CTL
  • CB
  • LEG
  • LLY
  • PBI
  • SDY (The ETF)

Whatcha think?

4 Responses to Updating the Perpetual Income Machine

  1. Well from a diversification standpoint I would say that’s not enough stocks. I would at least shoot for 10 stocks (assuming equal weighting).

    If not SDY should be a major portion of the portfolio.

    Besides what you’ve mentioned here how much do you really know about these companies? Have you looked at their annual reports for the past 5 years? Did you look at their SEC filings for that same period? While they have paid a dividend for years and increased it, will that continue? Do they have cash on hand to support their dividend?

    A larger question is this in a taxable account or IRA?

    • Thanks for raising some glaring issues.

      This is a taxable account. Two reasons – 1 I want this account to one day actually provide income maybe that will be in 10 years or 20 years, but I don’t want this account to represent another account that I can’t touch for 31.5 years (I have my 401(k) and Wife’s Roth IRA for that).

      How much do I really know about the companies beyond the metrics I used? Not much. Is it a great answer? Nope, but I have to believe if they have been increasing their dividend since I was 3 they have to be built on a strong foundation – not a great answer.

      I will bring cash on hand into the next update (great point)

      • Another thing I love is companies that do stock buybacks. Less shares increases the outstanding shares in value. XOM happens to be one of them I love because of this on top of their dividend.

        I’m surprised it didn’t make it on your list.

  2. Investing for yield right now is great, since risk-free fixed income is non-existent. Companies are sitting on record cash hoards and are widely anticipated to start increasing dividends big-time, possibly even some massive one-time payments by year end if dividend taxes are set to increase in 2012 under Obama’s new tax plan. Finally, if deflation sets in, anything with yield is going to look great in comparison to gold, real estate and non-dividend paying stocks.

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