Exploit Analysts' Opinions For Dividend Growth Investing

by: On Base

In this article, I show how I use analysts' opinions in my dividend growth investing. I describe the strength and limitations of analyst coverage for stock selection.

My Dividend Growth Portfolio

I have a portfolio of forty positions that I took over from an investment manager in May, 2012. I've learned and practiced dividend growth investing for the better part of a year and now have about 30 positions that satisfy the following investment strategy.

The thirty companies are included among the CCC or other relevant lists. The CCC stands for the "Dividend Champions, Contenders and Challengers" list maintained by David Fish. Also, I've considered companies on David Fish's "Frozen Angel's" and "Near-Challengers" lists, Chuck Carnevale's "Power 25 Index," and other companies that I identified that may fit a dividend growth portfolio.

Now, thirty companies in my portfolio have a dividend yield of more than 2.3%, at least 4% growth in dividends for the past 5 years, and a payout ratio below 80 percent. Also, my selected stocks exceed a threshold for the Chowder sum and host a respectable Tweed Factor (both factors included by Dave Fish in his monthly CCC update). Finally, the companies I've chosen have a purpose and a definable moat to fend off competition. These are the rules that I adhere to in forming my dividend growth portfolio.

My Use of Analysts' Opinion

Additionally, I consider analysts' opinion before making a decision to establish a position in a company. Being new to stock picking, I always look to see what analysts are saying about a stock I'm about to buy. This last step is not a part of dividend growth investing and is controversial (see comment string on Jeff Paul's Seeking Alpha article of April 5, 2013); I believe that by examining recent research reports and summaries, I have added value to the portfolio I am managing.

I am open to any source, newspapers, Seeking Alpha articles, etc., that report on analysts' opinions; but in my examination of stocks, I refer to three sources, consistently. Following is a brief description of these three sources.

Yahoo Finance Analysts Opinion: Provides a summary score ranging from 1.0 indicating a strong buy to 5.0 indicating a sell. The summary score derives from the weighted average of recommendations (strong buy, buy, hold, underperform, sell). Summary scores are given for the previous month and two months ago. I find that the analysts' opinion is dated, with a paucity of opinion for the most recent three-week period. You can purchase timely stock reports from this site.

StockScooter: Gives a summary of the pros and cons of a stock. The source also gives scores and comments for fundamentals, ownership, valuation and technical considerations. StockScooter, available from MSN Money, gives an overall score from 0 to 10, with 10 the best possible rating. I value the comments and make sure that I consider the pros and cons before purchasing a stock.

Equity Summary Score: Provides a consolidated view of the ratings from a number of independent researchers. The Summary Score, available to Fidelity Investment customers, uses the providers' historical performance on recommendations to generate an accuracy-weighted indication of the stock's worthiness. The Summary Score ranges from 0 to 10, with 10 the best possible rating. The information is current. I typically observe Summary Scores that incorporate from 9 to 14 analysts' positions issued within the three-week period immediately preceding my inquiry.

Correlation of the Scores from the Three Sources

The three sources provide a wealth of analysts' opinions concerning individual stocks. Additionally, each source amalgamates the information into a single score that rates the worthiness of each stock considered. This single number score is attractive to an investor, but here's where things break down according to my examination.

The table below shows the single number scores from the three sources for the thirty stocks identified by Jeff Paul in the April 5 Seeking Alpha article. (See link above.)

Summary Scores from Three Sources of Analysts' Opinion for 30 Stocks
Click to enlarge

Ticker

Yahoo

Scooter

ESS

Ticker

Yahoo

Scooter

ESS

APD

2.4

8.0

5.6

KMP

2.7

8.0

3.5

ARLP

1.9

10.0

8.2

LMT

2.8

8.0

8.5

AVA

3.1

5.0

7.6

MCD

2.3

9.0

7.1

CLX

2.8

7.0

8.0

MO

2.2

7.0

5.5

COP

2.6

9.0

9.1

MSFT

2.3

5.0

6.6

D

2.5

7.0

1.6

NHI

3.1

9.0

8.2

DLR

2.4

9.0

0.4

NU

2.1

7.0

3.3

EMR

2.5

8.0

7.6

NVS

2.2

9.0

6.3

EPD

1.7

N/A*

7.0

OHI

2.7

9.0

6.2

GEL

1.8

7.0

4.0

OMI

3.9

5.0

7.5

GIS

2.2

9.0

9.8

PG

2.2

8.0

8.6

HAS

3.2

8.0

6.8

RTN

2.5

8.0

8.3

HRS

3.3

7.0

9.3

SJR

2.9

9.0

9.1

JNJ

2.3

9.0

8.3

TXN

2.8

6.0

4.8

KMB

2.9

9.0

9.1

WM

2.9

7.0

2.9

*N/A indicates that the score for this equity was not available from this source

Click to enlarge

The second table shows the correlation coefficients between each two of the three data sets (Yahoo:Scooter; Scooter:ESS, and ESS:Yahoo). Also, this table shows the correlation coefficients for points on a line, and the range of correlation coefficients from 10 trials for two sets of 30 random numbers.

Correlation Coefficient for Each Two 30-point Data Set
Click to enlarge

Correlation Coefficients

Data Sets

Measured Correlation Coefficient

Coefficient Expected for a Linear Correlation

Yahoo:Scooter

-0.32

1.00

Scooter:ESS

0.18

-1.00

ESS:Yahoo

0.20

1.00

Linear (x,y), positive slope

-1.00

Linear (x,y), negative slope

1.00

Random:Random, 10 trials

-0.08 to 0.50

Click to enlarge

A pronounced lack of a correlation is evident when comparing the correlation coefficients for analysts' opinion to those for random sets of thirty numbers. In fact, some anti correlation is present; that is, some stocks rated favorably in one source are rated negatively in another source. This examination shows the futility of using the single number scores from multiple sources for guidance. Stick with the comments and observations that you get from the analysts' opinion.

General Comments Concerning Analysts' Opinion

Analysts write research reports for their subscribers. An individual, for example, will pay $249 per month to access reports on factivia.com, a research area of wsj.com. Alternatively, investment companies, such as Fidelity, E*Trade and Vanguard, buy many reports and make them available free to their customers. These companies are the most economical source of up-to-date reports, in my experience. The reports lose value with age and eventually many become available at no cost on advertiser-supported sites such as yahoo.com/finance.

Conclusions

Analysts' opinion can help improve your examination of stocks and should be consulted for dividend growth investing. I find the comments and observations from analysts of most value. I can verify the position of an analyst or take a contrarian view. Single number scores from multiple sources provide conflicting guidance, in my experience, and are not useful in making a stock selection.

I welcome feedback regarding sources for timely analysts' opinion at moderate cost.

Disclosure: I am long GIS, HRS, MSFT, PG, SJR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.