Changing my Undervalued Dividend Growth Screening Process

by Evan

From time to time, I like to alter the metrics I use to screen for undervalued dividend growth stocks. I do this for one main reason, I don’t do this for a living, and no one has a monopoly on good ideas, so by changing up the metrics every so often I become exposed to companies that may otherwise be amazing (in terms of business and value) but were precluded from a previous screen.

In the beginning I was using the dividend aristocrats and then comparing P/E to industry average, Operating Margin to industry average, and Price to Book vs industry average. Eventually, I moved from dividend aristocrats to dividend champions (and eventually opened it up to all companies with 20+yrs rather than 25+yrs of dividend growth history). I tried different metrics like CAPE, acquirer’s multiple view of investing, payout ratio’s etc, and currently I am using:

  • 20+years of Dividend Growth
  • P/E of less than 15
  • Dividend yield of 2%
  • Payout Ratio under 55%
  • Free Cash Flow Yield over 6%

My 2020 Undervalued Dividend Growth Screen

What really prompted this post was a recent article that I read and can’t find to link to it, but the overall discussion was whether there was value in finding those dividend growth stocks that are on their way to become dividend champions or dividend aristocrats before they actually get there. I like the general concept, and it would open me up to companies I haven’t had the opportunity to take a look at. So, my first screen will be those companies that have increased their dividend for 15 to 24 years – this information will come for a part of the Dividend Contender’s list. I am using 15 years, because I want the company to have increased their dividend throughout the anomaly that was 2008.

Given that I want to foster a safe dividend stream my next two metrics are associated with the longevity of the dividend. First, a company will have to meet will be a dividend payout ratio of under 50%. Second, the company will have to have a free cash flow yield of 5%+. These two metrics will show that they are making money and are not giving it all out to shareholders. Finally, I will remove all companies with a P/E above 20.

Lastly, I will take a quick view of each remaining option to make sure they are responsible with their outstanding shares. Specifically, I am looking for companies that have either a flat outstanding share count or have been buying back their shares as that may continue to increase the value of my purchase (of course it depends on if the company was purchasing the shares at the right time).

Given the recent drop in the past two days, I am very excited to search for new companies next week!

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