Undervalued Dividend Growth Screen, Watch List and Purchase for October 2019

by Evan

Every month I screen for undervalued dividend growth stocks and buy a lot (as defined by me as $500) or two.  My goal is that one day I can turn off the dividend reinvestment option and start taking a stream of income

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is part of their DNA and so they’ll continue to do so.  I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price in it of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Over the past few months I found that I was eliminating some otherwise investable stocks just because they were under 35% and that didn’t/doesn’t make a whole lot of sense to me.  So anything over 55% is eliminated.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My October 2019 Watch List and Purchase

Every month I screen for undervalued dividend growth stocks and buy a lot (as defined by me as $500) or two.  My goal is that one day I can turn off the dividend reinvestment option and start taking a stream of income.  This month I’ll be purchase two lots because I missed last month due to the house purchase and the flux my financial life was in at the time.

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is part of their DNA and so they’ll continue to do so.  I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price in it of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Over the past few months I found that I was eliminating some otherwise investable stocks just because they were under 35% and that didn’t/doesn’t make a whole lot of sense to me.  So anything over 55% is eliminated.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My October 2019 Watch List and Purchase

When I was reviewing my holdings earlier this month for sale opportunities, I really took stock in just how many different stocks I own. While I am not going to let affect me too much (i.e. sell just because of it), it has left me with this feeling that I should be building bigger positions in these stocks rather than keep opening new ones.

TickerFull TickerDividend YieldP/E RatioPayout RatioFree Cash Flow Yield
AFLNYSE:AFL2.1%12.3525.2%12.9%
BENNYSE:BEN3.8%9.9638%6.4%
CVXNYSE:CVX4.2%14.6259.4%7.6%
NUENYSE:NUE3.2%6.4622.1%7.8%
CAHNYSE:CAH4.2%9.7742.3%12.7%
ORINYSE:ORI3.4%9.3031.6%10.1%
WBANasdaqGS:WBA3.5%9.9535.1%6.8%

I currently have positions in the following stocks so we are going to take a deeper dive into:

  • AFL
  • BEN
  • NUE
  • ORI
  • WBA

First thing I wanted to check out was the trend line for outstanding shares.

I could have looked at the past 5 or 10 years, and I often do, however, for whatever reason Macrotrends populated the 15 year chart. The two that really stand out over the past 15 or so years are AFLC and BEN. Granted, this is probably not the best way to follow this exercise as I can’t tell percentages and I could easily argue that a better representation would be the past 5 or so years rather than going back that far. Notwithstanding, that is what I am running with this month (I can almost guarantee the process will be a bit different next month, the month after that, etc. etc).

My October 2019 Purchase

This month I have decided to purchase 10 shares of AFLAC bring up my share count to about 95 shares. I went with AFL over BEN because of the more attractive free cash flow yield and payout ratio.

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2 comments

Bob October 14, 2019 - 4:48 pm

Hi Evan, the FCFY looks like an interesting metric. What is the source of your data? I mainly use the CCC list, so am curious where you get the data from.

Reply
Evan October 16, 2019 - 11:41 am

So what I do is I screen ALL stocks using https://finbox.com/. I think copy and paste the CCC list into that spreed sheet and cross reference the lists to see what I end up with (that’s the watch list). Hope this helps!

Reply

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