One of my favorite monetary accomplishments this year is creating a dividend portfolio.  When I created that portfolio my first step was to use the dividend aristocrat index, which is a basket of stocks “within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.”  I updated the account earlier this year (around the 6 month mark), but  the aristocrat index is updated every December to drop or add those stocks which meet the criteria so I figured it would be a good time for Evan to update his perpetual income machine too!

Even though I have been investing in the following stocks for the past year, I have no loyalty to any of the companies so if they don’t meet my standards…I will allow dividends to continue to accumulate shares but I will stop actively investing in the company.  My current portfolio looks like (remaining % is in cash that I slowly move over during the month for the automatic purchase):

  • CTL – CENTURYTEL INC  19.5%
  • CB – CHUBB CORP 17.1 %
  • SDY – SPDR S&P DIVIDEND ETF 16.7 %
  • LLY – LILLY(ELI) & CO 16.1 %
  • PBI – PITNEY BOWES INC 9.3 % (Picked up in August Update)
  • SWK – STANLEY BLACK & DECKER, INC. 8.8 % (Dropped in August Update)
  • LEG – LEGGETT & PLATT INC 8.8 % (Picked up in August Update)

To implement this portfolio I use Sharebuilder.  While I don’t particularly understand Sharebuilder’s sale prices, I don’t plan on actively selling so I just rely on their fantastic automatic program:

Sharebuilder Advantage Rates

Since I am buying 6 automatic investments depending on blog income I will either use just 6 of the trades (averaging out to $2/trade) or I’ll use all 12 of the trades ($1/trade).

Updating my Dividend Portfolio Using 2011 Dividend Aristocrats

I am going to be using the following criteria to narrow down my individual choices (I will also have a portion of it in the Aristocrat Index ETF):

  1. They have to actually be on the Aristocrat List
  2. The stock has to have a Price to Earning that is lower than or equal to their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be between 2% and 5%
  5. Price to Book Value Should be Reasonable

Some quick definitions

  • Dividend Aristocrats are those dividend paying American companies that have increased their dividend for the past 25 years.
  • 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.”
  • 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”
  • 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.

The Dividend Aristocrat Index

The list dropped the following stocks:

  • Lilly, Eli & Co – (LLY)
  • Supervalu Inc – (SVU)
  • Integrys Energy Group Inc – (TEG)

Since LLY is no longer in the list they can no longer be invested in.  I have decided to keep the shares that I do own, at least, until they significantly reduce the dividend yield (they just chose not to increase it which is necessary to be apart of the Aristocrat index).

Dividend Aristocrat Price to Earnings by Stock’s Industry

The first Stocks I their eliminated  were those whose Price to Earnings Ratios were out of line with their industry average:

Full Dividend Aristocrats with Price to Earnings

We were able to eliminate 10 of the 42 Stocks.

Dividend Aristocrat Operating Margin by Stock’s Industry

Next I eliminated those stocks whose operating margin was not better than its peers in the industry (or only marginally better).

I was able to eliminate another 7 Stocks.

Dividend Aristocrat Dividend 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 2.2%

I was able to eliminate another 10 stocks.

Dividend Aristocrat Price to Book

Lastly, I was looking for those stocks whose price wasn’t through roof as compared to their book value.

This eliminate 7 more stocks.

Remaining Dividend Aristocrats to Build My Portfolio

I am left with 7 great stocks to choose from, however, I only can use 5 since I am trying to keep the basket at 5 plus the S&P Aristocrat EFT.  I have decided to continue my perpetual income machine with the following 5 stocks for the next 6 months:

While CTL, CB & LEG have been my portfolio in the beginning I am adding

  • MMM (3M) because its  P/E is lower than industry average, their operating margin is nearly triple of its industry and it has a yield of 2.4%
  • VFC (VF CORP) because its P/E is lower than industry average, their operating margin is a nearly one-third higher than industry average and it has a yield of 2.9%

Well there you have it a nearly 1,000 word post with spreadsheets! I’d love to hear some thoughts.