If you are a retired investor, after a month like this you might be considering a new investment strategy. Let me take some time to describe the strategy that's working for me. I first became a self-directed investor in 2011, a year with even greater volatility than we are currently experiencing. I took shelter from the storm that year in a select group of stocks that provided just the investment strategy I was looking for.
The income investment strategy I chose permitted me to have a portfolio that yields more than double what the S&P 500 index yields. This strategy produces income in excess of what I would have been permitted to withdraw from my account each month under the 4% withdraw rule. This strategy handles concern about inflation through a focus of stocks with dividend growth rates that surpass it.
To learn more about the strategy, the first step is the learn more about a select group known as Dividend Champions, Challengers and Contenders. For those of you that don't know Dividend Champions have the distinction of being stocks with a string of 25 years of growing dividends and more important for retirees like me, no cut in the dividend for that period.. There are currently 104 Dividend Champions with an average of 39.5 years of sustained dividend growth without a cut.
There are over 200 Dividend Contenders with dividend growth for at least the past 10 years. The group averages 14 years of sustained dividend growth without a dividend cut.
There are 164 Dividend Challengers with between 5-10 years of sustained dividend growth. The group averages 7.2 years of growth and again no cuts to the dividend.
A list of these stocks is maintained by Seeking Alpha contributor David Fish. It is updated the first of each month and is available through this link .
David also maintains lists of stocks called Near Challengers with four years or more of sustained growth. There are currently 89 Near Challengers. I currently own the following four: Beitburn Energy Partners (NASDAQ:BBEP), BCE Inc (NYSE:BCE), Bristol-Myers Squibb (NYSE:BMY), Dr. Pepper (NYSE:DPS) and Linn Energy (NASDAQ:LINE) through LinnCO (NASDAQ:LNCO). Finally he maintains a list of 43 stocks he calls Frozen Angels. Each of these fell from grace when they suspended the growth of their dividend. Of the 43 stocks in this group, some like Paycheck (NASDAQ:PAYX) and Royal Dutch Shell (NYSE:RDS.B) have resumed dividend growth. These two lists are available by clicking the Notes tab at the bottom of the Excel Spreadsheet.
For those of us favoring a dividend growth investment strategy, the information provided by David is priceless. Here anyone can quickly compare stocks by important metrics like yield, payout ratio, beta, 1,3,5 year rates of dividend growth and estimated 5yr earnings growth.
My investment strategy requires the development and execution of a portfolio business plan available here. My plan describes my investment goals and the specific conditions under which I will buy and sell positions. My plan further requires that I maintain and monthly update a watch list of Dividend Growth stocks.
To better understand my investment strategy, let me walk you through what has become my monthly ritual. The first of each month, I download a fresh copy of the Dividend Champions, Challenger and Contenders. As part of my business plan, I have set a 3% yield for new purchases, so I eliminate all stocks for the list with yields of under 2.5%. My edited list from last month contained 167 stocks for consideration. My list contained 19 Dividend Champions with an average dividend yield of 3.43%. I currently hold 12 of the 19 holdings from this list. My edited list of Dividend Contenders totaled 78 with an average dividend yield of 3.74%. I currently hold 22 stocks from this group. Finally, I have an edited list containing 70 Dividend Challengers with an average yield of 4.59%. I currently hold 17 stocks belonging to this group.
Little by little I am further reducing the stocks on these lists. Before I consider any new stock for purchase, I go to the Morningstar site and check 10 year, year by year performance. I will not consider a stock that lost money more than 4 out of the 10 years. I also pass on stocks that lost more than the S&P 500 Index in 2008. I like stocks that have shown they can out perform during severe markets. While capital gain no longer drives my decision making process, capital preservation remains important. Stocks that don't routinely suffer as much during severe downturns are in my opinion more likely to sustain their dividend and dividend growth. Each of the 19 remaining Dividend Champions passed this test.
Just this week, I completed the ten year performance reviews for the Dividend Contenders on my list, and 11 stocks failed to make the cut. Finally, I conducted 10 year performance reviews of my selective Dividend Challengers and an additional 19 stocks were removed from consideration.
Let's look closer at the 132 stocks that remain. The remaining stocks have a combined yield of 4.09%. Their average estimated 5 year growth is 9.1%. Their average 5 year Dividend Growth Rate DGR is 11.5%, their 3 year average is 9.9% and their 1 year rate is 10.8%. The average 5 year beta for the group is .68
Est. 5 Year
5 yr BETA
Since David will likely release the next update for the Dividend Champions, Contenders and Challengers this weekend, I hope each of you will become more familiar with this important resource. I hope each of you will take the time to explore whether the investment strategy I've just described is the right fit for you.
Disclosure: I am long BBEP, BCE, BMY, DPS, LNCO, PAYX, RDS.B. 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.