I attempt to screen and purchase undervalued dividend growth stocks. These companies have increased their dividend for at least 15 years and have a lower than average price to earnings (PE) ratio, a higher operating margin, a low price to book, a reasonable dividend yield and payout ratio. This is easily my favorite part of my financial empire.
Every 60 days or so I like to update the watch list for my Dividend Investment Portfolio and since my last update was in February 2012 I figured it was about time. These posts are to provide myself with a “watch list” for stocks to buy based on a snap shot in time of the stocks’ metrics (in this post it is 4/4/12). The goal with my dividend investment portfolio is to be an income stream one day. This project is not a 3 month or 6 month project, but rather a 10 year one.
My dividend portfolio is made up of 2 parts:
- Three ETFs that cost nothing to buy through my broker Fidelity and
- Timed purchases of “the watch list” which is created using metrics to determine if a stock is undervalued
The starting point for the watch list is the dividend champion list. When I first started this account I primarily used the dividend aristocrat list, until I learned that there are other dividend lists besides the dividend aristocrats that follow my goals and objective. The main difference between the dividend aristocrat list and the dividend champion list is that to be a member of the former a company doesn’t need to be found on the S&P index.
Part 1: Income ETFs in my Dividend Investment Portfolio
This is the boring part that is on auto-drive so I have some broader exposure to market sectors. I buy one share of 3 ETFs each month (remember: cost is not an issue as these are free in Fidelity):
- DVY – The investment seeks to replicate, net of expenses, the Dow Jones Select Dividend index…The index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. index.
- IDV – The investment seeks to replicate, net of expenses, the Dow Jones EPAC Select Dividend index…The index consists of 100 of the highest dividend-yielding securities (excluding REITs) in the Dow Jones World Developed-Ex. U.S. index. The fund is non-diversified.
- IYR – The investment seeks to replicate, net of expenses, the Dow Jones U.S. Real Estate index…The index measures the performance of the real estate sector of the U.S. equity market. It includes companies in the following industries: real estate holding and development and real estate investment trusts. The fund is non-diversified.
I have not and will continue not to reinvest the dividends in these ETFs. Instead I use the income produced to purchase additional shares of those stocks that make up Part II.
Part II: April 2012 Update of the Stock Part of my Dividend Investment Portfolio
- They have to actually be on the Dividend Champion list – Updated monthly
- The stock has to have a Price to Earning that is lower than their industry average
- Their Operating Margin has to be in line with the particular stock’s industry average
- Dividend Yield should be between 2 and 5%
- Price to Book Value Should be Reasonable (under 3)
Two quick notes:
- I don’t take the restrictions too seriously. For example, if a stock is right at the cusp or even a little bit above/below a metric I will let it fly.
- The Yield and P/B change monthly after I have narrowed down from the P/E and OpMargin just so I have a healthy watch list.
Some quick definitions
- 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
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 (or only marginally better).
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% or more than 5%. As stated, this is a moving target depending on how many stocks I have left to choose from.
Dividend Aristocrat 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.
Remaining Dividend Aristocrats to Build Part II of My Dividend Investment Portfolio
The remaining stocks that I will be investing for the next couple months are:
- Dover Corp
- Eagle Financial Services
- Hormel Food
- Illinois Tool Works
- Middlesex Water Co
- National Fuel Gas
- Proctor & Gamble
- Sonoco Products
I will continue my $300 – $500 lots at or near short term dips in the stock which I keep an eyes on using my Google Docs as my Investment Tool.
I spend a lot of time on these portfolio updates, but I am not providing investment advice rather I want to hear what EVERYONE thinks about it!