While I missed August’s screen every other month for the past two years I share my process to screen for undervalued dividend paying stocks that have increased their annual dividend payment for 20 or more years. Since I didn’t do any research I didn’t buy or sell any stocks in this account for the month August. I did however receive $49.72 in dividends which is about a 30% increase year over year:
As I have mentioned in the past this (along with every other) update takes a snapshot of certain metrics on a certain date. This update was done on the evening of September 8, 2014. The shared spreadsheet below does not update automatically.
My Dividend Investment Portfolio Screening Criteria – INCLUDING NEW CRITERIA
- 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).
- BRAND NEW – Dividend Payout Ratio – After a few commenters brought it to my attention that I was missing this important metric given my goals I have added it. Yes, it took me this long to actually implement it. Nevertheless, thank you to those readers.
You may notice that some of the stocks aren’t eliminated if they barely fail a metric test. This is because I don’t want to eliminate a stock that is within a range that eyeball since I am taking a snapshot.
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.
- 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 154 equities to 47! Unsurprisingly that was an even more extreme elimination than the previous month.
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 2.5%. This is a moving target depending on how many stocks I have left to choose from. Sometimes I go for 2% sometimes 4%
Since yield in of itself is derived from price this is another indication of a hot market (not that we needed one).
Fifth Stock Screen: Payout Ratio
Brand new this month 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. I would love some input on the topic.
My Dividend Watch List for July 2014
|Community Trust Banc.||CTBI|
|Eagle Financial Services||EFSI|
|First Financial Corp.||THFF|
|Johnson & Johnson||JNJ|
|MGE Energy Inc.||MGEE|
|Sonoco Products Co.||SON|
|Tompkins Financial Corp.||TMP|
|Arrow Financial Corp.||AROW|
I now compare these companies to their 52 week high/low. I like buying companies closer to its 52 week low to capture easy upside, however, finding an undervalued company is goal number one.