I recently explained that I want to set up a dividend paying portfolio.  In that post I went over how I planned on starting to create this perpetual passive income account.  So this is basically my thought process on how to narrow down 4 or 5 stocks to create the dividend portfolio, which I am going to name “Perpetual Income Machine.”  I am going to start very small, and as I get more comfortable I will increase the weekly/monthly contributions.

Dividend Aristocrats

The first thing I did was pull the Standard and Poors Dividend Aristocrats list.  The S&P Dividend Aristocrats are blue chip stocks that have paid increasing dividends for the the past quarter century.  Luckily, this took from a list of thousands of dividend paying stocks in the United States to a much more manageable 43.

Next I researched some statistics I thought were key to start cutting down the list.  These include Price to Earnings of the company, Price to Earnings average of the industry, the Profit Margin and the average Profit Margin of the Industry (by the way I put these in by hand so that took me forever lol).

I was able to cut down a few off that list just because I didn’t like how their P/E and Profit Margin compared to industry averages.  So I ended up with this list:

Next I looked to Yield.  I am not yield chasing, by any means, but I figured after that some of my remaining choices should have been lower than their Aristocrat peers.  With the exception of one or two, I was wrong.

With the list still too big, Matt SF from Steadfast Finances, told me to take a look at the Price to Book Value.  The P/B value is defined by investopedia as,

What Does Price-To-Book Ratio – P/B Ratio Mean?
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.

Also known as the “price-equity ratio”.

Calculated as:  Stock Price/Total Asset – Intangiable Assets and Liabilities
Investopedia explains Price-To-Book Ratio – P/B Ratio
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies  by industry.

This ratio also gives some idea of whether you’re paying too much for what would be left if the company went bankrupt immediately.

Matt SF explained that the lower the ratio the better. I was really feeling PBI until their P/B came out to just under 400, when I was shooting for 1ish!

With all the research I came up with Three Stocks that I think I am going to move forward on they are:

  1. CTL – A P/E ratio of 6 points lower than industry average; their profit margin is almost double than industry average; a dividend yield of 8%; and a P/B of 1.12
  2. CB – A P/E that is on par with the industry; A profit margin that is about 25% higher than the industry; yield of 2.8%; and a P/B of 1.13.
  3. LLY – P/E that is under the industry; the profit margin DESTROYS the industry (29.17% vs 1.69%!); healthy yield of 5.8%, but the P/B is a little high at 3.95

I’d like a fourth investment for this experiment.

So, I ask you what’s wrong with my analysis? Is it good for a first timer? What should be my fourth pick?