For the past few years it has been my goal to purchase undervalued stocks that have been paying a growing dividend for the past 20 years. I use a number of metrics described in detail below, but the main reason I write and share these posts to keep myself accountable to the long term growth and build up of this account. Notwithstanding, for the first time in a long time, I didn’t even bother to create a watch list in August, but I did buy multiple lots versus my usual one time purchase. I used July’s list and bought more lots than I usually do considering the massive hits the broad market took last month. To say that it was a rough month for investors would be a huge understatement. I kept repeating the mantra handed down by Warren Buffett:
Dividend Investment Portfolio Activity in August 2015
August was an unusual month for me with regards to this portfolio. Usually, I would create the list and then a few days later I would purchase something that looked attractive. Well, I created my July 2015 Undervalued Dividend Watch List so late in the month, that when I went to go do the work again (and boy is it a lot of work) it was only 10 or 11 days later so I figured lets just buy and skip the month. I wanted to buy something not in the energy or financial sector and ended up buying:
- 6 Shares of GPC at a price of $86.76. When I bought on August 12th they a P/E of 18.7 vs 48.1 for competitors, a 3.64% dividend yield and is only off 3.64% of its 52 week lows (vs 25.79% off its 52 week high).
Sort of a higher than average P/E for my purchases in this account, but I knew I wanted in on the company. If August 2015 had been like any other month, then this would be it – I bought my $500 – $1,000 worth of equity and I move on. August 2015 wasn’t like any other normal month:
- On August 21 I added another 8 Shares to my CAT position for a total purchase price of $612.51
- On the morning of August 24 I initiated my first position in UTX buying 10 shares for $896.84
At this point the broad market has given back the gains for the past 14 months or so, my hope is that when the tide rises these undervalued stocks will get the love they deserve and increase with them.
My August 2015 Dividend Income
Attempting to Find Undervalued Dividend Champions for September 2015
This, along with everyone of these dividend research updates, is a snap shot in time (this one was done on the night of September 1, 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
All data is taken manually from Morningstar:
- The company has paid increasing dividends for at least 20 years
- 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 shareholdersthis month was 50%. 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 158 equities to about 50!
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%
Fifth Stock Screen: Payout Ratio
Next, I eliminated those equities whose payout ratio was 50%+.
|Arrow Financial Corp.||AROW|
|Chesapeake Financial Shares||CPKF|
|Community Trust Banc.||CTBI|
|Eagle Financial Services||EFSI|
|Farmers & Merchants Bancorp||FMCB|
|First Financial Corp.||THFF|
|First of Long Island Corp.||FLIC|
|Helmerich & Payne Inc.||HP|
|Sonoco Products Co.||SON|
|T. Rowe Price Group||TROW|
|Tompkins Financial Corp.||TMP|
|Wal-Mart Stores Inc.||WMT|
So now my goal is to buy on those massive dips that we have been feeling lately! Anyone like any of these companies?