Every month for the past couple of years I have spent a few hours putting together this post. You may think that a few hours is long time, but most people put more time in searching for a TV, Computer or other consumer item that will likely be gone before I sell my holding. The purpose of my research is to find undervalued stocks that fit very specific metrics.
A side note before I being: As I re-read the Intelligent Investor for the second time it has come apparent to me that I, unknowingly at the time, have been creating a safety net with my metric choices. First, I take the entire U.S. Stock Market and bring them down to the 150 or so stocks that have increased dividends for the past 20+ years. I then take those and look for companies that are valued less than their peers, but making more money and are close to their 52 week low to ensure an upside.
Before we look at possible future investments, I want to highlight my activity in January 2015
Dividend Investment Portfolio Activity in 2015
When I created my last screen a stock popped up that I had no real history with, CFR – Cullen/Frost Bankers. Noticing it was near its 52 week low despite some great metrics I figured I should look into the sudden drop 8 – 10% Drop. It turns out that CFR is a Texas bank with a lot of ties to the obviously large oil industry down there. As you have likely noticed at the pump oil is plummeting, however, since I am likely to own the company for years to come it seemed like a great opportunity to get in.
- I bought 10 shares at $67.74 on 1/5/2015
- However, when the company dropped even lower with no changes in the metrics or news I bought more. On 1/9/2015 I bought another 9 shares at $63.93.
This stock has increased its dividend for the past 22 years, I don’t think the dip in oil is going to hurt the business all that much (I also found a few articles that agreed with that sentiment).
I usually only buy one lot between $500 and $1,000 but I feel like this dip in oil is providing a buying opportunity and I bought more CVX:
- I bought 5 shares of CVX on 1/30/2015 for $99. Under $100 for a share of CVX? Sign me up!
I didn’t sell anything in January.
Dividend income in January 2015
While the account is 10% higher than what it was in 2014 (not that I gained 10%, but rather I have the whole numbers from my net worth statements), my dividend income was actually down from January of last year. My guess is that it has to do with when things get credited to the account, and I am not going to worry about it:
This, along with everyone of these dividend research updates, is a snap shot in time (this one was on the night of February 11, 2015). So please don’t use my data as anything but a starting point for your own research. I use the metrics below to get to a “watch list” which I use to try and purchase equities closer to their 52 week low.
My Dividend Investment Portfolio Screening Criteria
The first five steps’ data is taken, manually, from Morningstar while Dividend Payout Ratio is taken from Dividend.com:
- The company has paid increasing dividends for at least 20 years – 154 entries this month!
- The stock has to have a Price to Earning that is lower than their industry average. The Price to Earnings Ratio has to below 20 regardless of industry average.
- The Operating Margin has to be in line with the particular stock’s industry average. I want companies that are profitable as compared to their peers.
- Price to Book – Should be below 4, but if it isn’t it must be in line with industry average (or lower).
- This monthly update the Dividend Yield should be above 2.5% (changes whenever I update the list depending how many stocks I have left after the first 4 steps).
- Dividend Payout Ratio – It took me a long time to add this to my screen but basically I weed out any companies paying over 60% to shareholders. Couple reasons. The main one would be sustainability, but also, I do want growth in a company and if all dollars are going out it is likely to hurt the company in the long run.
Since this is a snapshot I am not that strict since I am well aware that if the underlying company opens a tenth of a percent the other way it could pass a metric.
Definitions of Metrics Used for my Dividend Investment Portfolio
Since not everyone knows what I am talking about above I have provided definitions (all quotes taken from Investopedia):
- 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&P 500. I have included a part of the dividend contenders list (20+ years but less than 25).
- 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.”
- 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 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”
- Payout Ratio – “The proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage…The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payments.
Applying My Stock Screen Criteria to the Dividend Champion List
First Stock Screen: PE Ratio
The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average. I also eliminate companies with PEs above 20 regardless of their industry average. This brought me down from 155 equities to 59!
Second Stock Screen: Operating Margin
Next I eliminated those stocks whose operating margin was not better than its peers in the industry. I want the companies I invest in to be more profitable than their peers. This way unless there is a huge problem with the industry they’d be less likely to stop doing something (i.e. paying increasing dividends) that they have been doing for the past 20+ years
Third Stock Screen: Reasonable Price to Book or in line with their Industry
I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued. In an effort to limit the unintended consequence of choosing stocks with a lot of tangible or financial assets on the books I have started comparing the P/B to the industry average.
Fourth Stock Screen: 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 2.4%. This is a moving target depending on how many stocks I have left to choose from. Sometimes I go for 2% sometimes 4%
Fifth Stock Screen: Payout Ratio
Next, I eliminated those equities whose payout ratio was 60%+. I am not sure if this was a good level but from the articles that I have read indicate that is the top end for most stocks.
Undervalued Dividend Watch List for February 2015
|Black Hills Corp.||BKH|
|Community Trust Banc.||CTBI|
|First Financial Corp.||THFF|
|Johnson & Johnson||JNJ|
|MGE Energy Inc.||MGEE|
|National Fuel Gas||NFG|
|Sonoco Products Co.||SON|
|Tompkins Financial Corp.||TMP|
|First of Long Island Corp.||FLIC|
|Arrow Financial Corp.||AROW|