I recently had to change the way my dividend investment portfolio operated and I realized that while I came to the logistics of how I would actively invest in it I didn’t actually pick the new stocks I would be investing in for the next couple months. I used to narrow down the Dividend Aristocrat list using the metrics described below and invest in each twice a month for a set amount using Sharebuilder, however, since the change my dividend investment portfolio will have 2 equal parts:
- Three ETFs that cost nothing to buy through my new broker Fidelity and
- Random purchases of “the watch list” which is created using the same exact metrics
Considering the work it does to create a post like this and the fact that I am investing in companies that have proven themselves by increasing their dividend payouts for the past 25 years I don’t mind putting it on autopilot for months at a time. Notwithstanding my last update was in May of 2011 so it is about time!
Part 1: Income ETFs in my Dividend Investment Portfolio
- 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 will not be reinvesting dividends in these ETFs, rather I will be using the income from these investments to purchase additional shares of those stocks that make up Part II. These particular ETFs can be purchased commission free from Fidelity so they really appeal to me, but I refuse to give up on my original idea of purchasing undervalued Dividend Aristocrat members which leads us to Part II.
Part II: July Update of the Stock Part of my Dividend Investment Portfolio using the Dividend Aristocrats
- They have to actually be on the Aristocrat List
- 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 above 2.5%
- 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.
Dividend Aristocrat 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 Aristocrat 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 Aristocrat 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%. 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:
I am not sure how much I will be able to purchase in the upcoming months, but I will save at least $200 for each purchase, so that the $8/trade isn’t a huge chunk (percentage wise). This is going to be difficult for me since the portfolio grew on a platform that was so cheap per transaction ($1/auto trade), but it is what it is.
I spent a lot of time on this portfolio, but I am not providing investment advice rather I want to hear what EVERYONE thinks about it!