August Dividend Champion Portfolio Update

 |  Includes: AWR, CVX, HP, LEG, MO, NWN, UGI, UVV, WGL, XOM
by: Scott's Investments

In December 2010, I created a screen / hypothetical portfolio called the "High Yield Dividend Champion Portfolio." The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on my site. Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, "Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields."

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the "Dividend Champions" as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

In January I announced some changes to the ranking system. The changes were not due to poor performance – the strategy has returned over 75% since late 2010. We still begin with the Dividend Champion list. The list is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a "high" yield make the portfolio. The remaining stocks are then assigned a rank based on their yield (the higher the yield, the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase). Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock. This month there is turnover in two positions – California Water Service (NYSE:CWT) was a holding since 4/5/13 and appreciated 11.14%. Air Products & Chem (NYSE:APD) was a holding since 2/5/13 and appreciated 23.25%.

The two new positions are UGI Corp (NYSE:UGI) and Leggett & Platt Inc. (NYSE:LEG). As of the end of July UGI yielded 2.7% with a 51% payout ratio and LEG yielded 3.7% with a payout ratio of 67%.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are July month-end):

Name Symbol Yield Payout A/D* 3-yr
Helmerich & Payne Inc. HP 3.16 35.46 1.517 11.9
Chevron Corp. CVX 3.18 30.23 0.956 9.7
WGL Holdings Inc. WGL 3.65 55.45 1.347 2.9
Altria Group Inc. MO 5.02 80.37 1.251 8.7
ExxonMobil Corp. XOM 2.69 25.69 1.081 9.5
UGI Corp. UGI 2.69 51.36 1.147 10.5
Leggett & Platt Inc. LEG 3.69 67.44 1.153 3.8
Tompkins Financial Corp. TMP 3.37 58.91 0.843 5.7
Target Corp. TGT 2.41 40.38 1.102 24.7
Northwest Natural Gas NWN 4.14 86.26 1.245 3.8
Clorox Company CLX 3.30 66.51 0.910 8.9
Genuine Parts Co. GPC 2.62 48.31 1.170 6.8
Questar Corp. STR 3.02 60.50 1.035 9.6
Universal Corp. UVV 3.26 42.92 0.585 2.1
American States Water AWR 2.52 54.36 1.528 7.9
Click to enlarge

The current portfolio is below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 106.45 12/6/2012 16.48%
WGL 38.61 12/6/2012 19.61%
HP 65.48 7/5/2013 1.25%
UVV 45.55 4/5/2012 39.10%
UGI 42.49 8/5/2013 0.00%
LEG 31.72 8/5/2013 0.00%
XOM 89.01 4/5/2013 2.90%
MO 34.24 3/5/2013 4.00%
AWR 54.5 7/5/2013 19.65%
NWN 44.24 4/5/2013 -0.66%
Click to enlarge

The portfolio performance is below along with three benchmarks:

Click to enlarge

Disclosure: No positions