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After writing the controversial titled article, The Hard Truth of Dividend-Growth Investing, I wanted to follow up with a fully automated strategy based on David Fish's CCC list that highlights the happy truth that these stocks can generate significant market-excess returns if you spend a few minutes looking at yields and value.

Dividend Growth Portfolio (David Fish CCC List)

Not wanting to take any credit or detract from the laborious and benevolent work of David Fish, I prominently placed his name in the title of this model and made it available without cost. For those familiar with the work of David Fish, he categorizes stocks according to how long they have been annually increasing dividends.

  1. Challengers (5-9 yrs)
  2. Contenders (10-24 yrs)
  3. Champions (25+)

In the previously referenced article, my tests suggested that survivorship-bias would lower returns by about 5-7% annually. If you wish to subtract this from the following strategy that does not account for stocks that went bankrupt or froze dividends - you are welcome to do so. (All charts, statistics and diagrams are compliments of Portfolio123)

Building the Dividend-Growth Strategy

We start by simply using the entire CCC list provided by David Fish. (All stats are using 10 year trailing back-test and includes dividends). We use 3 month re-balancing periods.

  1. CAGR 17.6% Max Drawdown -37.74%Sharpe Ratio 0.84

From here we choose the top 25% yielding stocks

  1. CAGR 20.46% Max Drawdown -33.07%Sharpe Ratio 1.07

Next we rank the stocks as to which have the deepest value based on a such things as price to book, price to earnings and price to free cash flow. In addition to this we add some liquidity rules. As well, the stock either needs to have a three year divided growth rate of at least 2% or have a trailing payout ratio less than 85%. We keep only 15 stocks. The result? Here is the chart and below are some statistics.

(click to enlarge)

  • Average days held: 86
  • Average return: 5.83%
  • Winners: 67.7%
  • Slippage: 0.15%
  • Annualized Return (OTCPK:CAGR): 27.87%
  • Average Yield: 4.28%
  • Market Cap Weighting: 46.5% large, 11% mid, 32.5% small and 10% micro

Current List of Stocks

Ticker

Name

MktCap

Industry

Div5YCGr%

Yield

(NASDAQ:AUBN)

Auburn National BanCorp Inc

79.27

Commercial Banks

4.56

3.86

(NYSE:BBY)

Best Buy Co. Inc.

7518.83

Specialty Retail

7.49

3.06

(NYSE:COP)

ConocoPhillips

72359.21

Oil, Gas & Consumable Fuels

9.99

4.45

(NASDAQ:CTBI)

Community Trust Bancorp Inc

528.81

Commercial Banks

2.59

3.72

(NYSE:DX)

Dynex Capital Inc.

592.62

Real Estate Investment Trusts (REITs)

9.04

10.62

(NYSE:LG)

Laclede Group Inc. (The)

928.96

Gas Utilities

2.6

4.13

(NYSE:MDP)

Meredith Corp

1615.85

Media

15.24

4.48

(NASDAQ:MHLD)

Maiden Holdings Ltd

771.19

Insurance

27.29

3.38

(NYSE:PPL)

PPL Corp

17551.43

Electric Utilities

3.37

4.87

(NYSE:PRE)

PartnerRe Ltd.

5520.95

Insurance

7.59

2.73

(NYSE:RTN)

Raytheon Co.

18734.51

Aerospace & Defense

14.42

3.5

(NYSE:SWY)

Safeway Inc

5961.15

Food & Staples Retailing

20.43

2.81

(NYSEMKT:TSH)

Teche Holding Co

82.21

Thrifts & Mortgage Finance

2.92

3.61

(NASDAQ:TWGP)

Tower Group International Ltd

791.95

Insurance

47.05

4.12

(NYSE:UVV)

Universal Corp

1299.67

Tobacco

2.2

3.59

Comments on CCC Portfolio List

It is important to note that when trading based on value, you will often have some stocks on the list that the majority will question. That is what investing is all about - choosing a system, going against the grain at times and sticking to your guns. What are some aspects of this list that some might point out?

  • Safeway has a debt-to-equity ratio of 1.79 while the industry sits at 0.49. PPL and TSH are also well above 1 and above the industry average.
  • The average recommendation on Safeway sits just under 3… with 1 being a strong buy and 5 being a strong sell - that isn't great. Other stocks with a similar analyst rating are CTBI, LG, UVV, MDP and BBY.
  • Some like to consider which are growing at a reasonable rate. DX has 43% sales growth (TTM) while the earnings growth leaders are PRE, BBY, MHLD, UVV and SWY.

I have compiled the chart below for those of you who like to analyze various value metrics vs. the industry average.

(click to enlarge)

Summary

There is little advantage to blindly buying any type of stock in the market whether it be value, growth, dividend, share buybacks or momentum. But for those who like to buy stocks based on the CCC list and enhance this with a little valuation buy and sell strategy - the happy truth is that you have a history on your side that this type of investing works well.

Source: The Happy Truth Behind Dividend-Growth Investing