It’s going to be interesting to me to look back in a year or two at some of these posts because it feels like the market is either about to shoot up some more with a strong base underneath it which was tested in December 2018, or this could all come crumbling down quickly!
Regardless, I march onward searching for possibly undervalued stocks that have increased their dividend for at least 20 years. 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.
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 July 2019 Watch List and Purchase
Upon looking at the screen, I noticed that I lost a few great names to spending too little on dividends so for this month I took out that bottom limit. I am left with the following stocks:
| BEN | Franklin Resources, Inc. |
| EV | Eaton Vance Corp. |
| NUE | Nucor Corporation |
| ORI | Old Republic International Corporation |
| PH | Parker-Hannifin Corporation |
| WBA | Walgreens Boots Alliance, Inc. |
I have a position in all of them except Eaton Vance, and they have been coming up month after month. What is Eaton Vance ?
Eaton Vance and its affiliates offer individuals and institutions investment products and wealth management services and creation, marketing, and management of investment funds. It provides investment products to individuals, institutions and financial professionals in the US, including wealth management solutions, defined contribution investment only and sub-advisory services.
I was already partially familiar with their business as I have bumped into their name in my professional life. Next I wanted to make sure their outstanding shares have been steady or decreasing. I do not want to buy a stock that just constantly dilutes my earnings per share:
Looks like a pretty steady decline over the past 10 or 12 years. A few bumps but percentage wise nothing too crazy. I am going to open a new holding with just a single lot purchase this time around.
Interesting list, thank you for sharing.
Are you worried abou the future of BEN with all the automation / index funds nibbling away at their profit?
It is absolutely a worry of mine, even more so because I live in the financial planning world and have seen the shift first hand. That being said I think they have leaned a little bit to that side introducing some passive ETFs with lower expenses. Obviously, that is going to hurt margins. For what it is worth, I think EV would also fall into this category as well.
I have this theory that I think the slow down into passive will happen when we have that first nasty correction in a decade. When people wake up and see that passive cut their net worth by 10$%or 20% I think there will start to be a balance and place for both types of investing.