One of my favorite parts of my financial “empire” is my Dividend Portfolio (a/k/a Perpetual Income Machine).  While it is not big by any stretch of the imagination worth only a couple grand, I have been throwing more and more money at it per month so I feel that it deserves more attention.  Actually, I don’t even think I have an empire yet, maybe just one of those straw huts.  Prior to my update in December of 2011, I updated the account only once before at the 6 month mark, but as I just stated I am going to update the account once every 3 months.

Creating my Perpetual Income Machine

My goal is to find undervalued stocks only within the dividend aristocrat index.  The reason I keep my investing to the dividend aristocrats is because of what the index represents.  The S&P Dividend Aristocrats index are,

large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

Since I am first and foremost creating a future income stream (which is also why the portfolio is not in a qualified-retirement account) I want stable companies that have paid a consistent stream of income (i.e. a quarter century of increasing dividends will do it!).  The criteria I used to build this particular portfolio:

  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.

Over the past year with 2 updates my portfolio looks like this:

  • SDY – S&P Dividend ETF – 19.1%
  • CB – Chubb Corp – 18.8%
  • CTL – CenturyTel – 18.6%
  • LEG – Leggett & Platt – 13.3%
  • SWK – Stanley Black & Decker – 7.2% *(Not currently being added to because it failed the last update)*
  • VFC – V.F. Corp – 7%
  • PBI – Pitney Bowes – 6.7% *(Not currently being added to because it failed the last update)*
  • MMM – 3M – 6.7%
  • BDMXX – Money market – 2.7% (used to hold cash before next automatic investment date)

I have absolutely no love for any of the companies, I actually don’t even remember what they all do.  For me, with this particular portfolio, it is all about the numbers that I am about to go through.  The only time I will sell a holding is if they get kicked out of the index like LLY was in December.

Dividend Aristocrat P/E Elimination

First, I eliminated those stocks whose Price to Earnings Ratio was not better than their industry average.

 

Dividend Aristocrat Operating Margin

Second, I eliminated those stocks whose Operating Margins were not better than their industry average.

 

Dividend Aristocrat Dividend Yield

While I am not chasing yields I would like at least a 2.0% yield, so I eliminated those stocks who had a less than 2.0% dividend yield.

 

Dividend Aristocrat Book Value

My last criteria was that their book value be under 4.5.

 

Which Dividend Aristocrat Stocks Should I Invest In?

It took me a long time to compile the data and hand deselect which stocks I am interested in, however, after researching these 4 criteria I ended up with the following 15 options:

 

 

Updating the portfolio has nothing to do with the past, only moving forward.  In this update I have decided to move forward with:

  1. MMM – While their book value is a little high for me, they have an operating margin that is 3 times their industry.
  2. AFL – I did it for the duck.  Seriously though their P/E is half of that of the Financial Services Industry average and its operating margin is 5 times their industry.
  3. CTL – While their P/E is closer to their industry than I would prefer the rest of their stats are stellar.
  4. CB – Their operating margins are almost  double their industry average and their book value is only 1.1
  5. LEG – Their P/E is really high at 20.5 but it is more than half the industry average, and while their operating margin is low it is still double their industry. Plus it has a sweet 4.75% yield

As always, in addition to these 5 stocks I will be picking up the Dividend Aristocrat ETF just so I can hedge my bets a bit (i.e. if I chose wrong).  This is simply an experiment and nothing here should be construed as financial advice.

 

These are unusually lengthy posts that take me forever to compile so I would love some feedback