With the recent pullbacks in dividend growth companies such as Coca Cola (NYSE:KO), and Target (NYSE:TGT), one might ponder on what to pick up. I like a good current yield, dividend growth, and an acceptable overall total return for my portfolio. I believe presetting my buy target prices ahead of time will prevent emotional trading. I determine the buy target prices by following this list:
checking valuations and fundamentals
setting a desired dividend yield (range)
using simple technical analysis
Here I shall show you my simple process to help you filter down your watchlist for companies to buy for long-term dividend growth and prosperity!
Preset Buy Target Prices with a Watchlist
Develop a watchlist of quality companies you want to buy. So that when you have excess cash on hand, you can buy the one that fits in your portfolio. Namely, it increases your overall yield, it further diversifies your portfolio, it is the best valued company at the time, or a mix of all of the above.
Here is what I do. On Finviz, I organize portfolios of watchlists. These watchlists have buy price targets which are made without emotion, BEFORE a buying opportunity presents itself. These buy targets are the maximum prices I'm willing to pay for each company.
In the "Cost" column, I set the buy price target for each company
When the "Gain%" column is in the red, it means your preset buy target is reached.
When a company on your watchlist shows a red percentage, you can then decide whether it still fits into your portfolio.
I set my buy targets based on a mix of valuations, technical analysis with the moving averages, and target dividend yield. (Details appear later in the article)
For example, from the above screen shot in Finviz, my preset fair price would indicate that Target , and Coca-cola are valued more attractively than Kimberly-Clark (NYSE:KMB).
Even with a long watchlist, one could easily scan for the red percentages in the "Gain%" column for buying opportunities. The larger the negative, red percentage, the more undervalued the company is priced at! So, the "Cost" column is really the maximum price I'm willing to pay for the company. Remember to update the "Cost" column (our buy price targets) periodically.
A) Check Valuations and Fundamentals
One criterion which helps me to determine the buy target of a company is looking at the company's valuations and fundamentals.
1) FAST Graphs (link)
FAST Graphs shows in a graphical manner the historical normal P/E of the company, its earnings trend, its earnings stability, and up to its past 20 years of dividend growth. I take special notice to the company's recent, past 5 years' dividend growth trend.
At the bottom of the left margin of FAST Graphs, there's a yellow-texted link. Clicking on it leads to MSN Money's earnings estimation of the company. At the bottom of the page, you can see the earnings growth estimations of the current fiscal year, next fiscal year, and the next 5 years. That, I use as a cross reference to FAST Graph's estimation using consensus analyst estimates.
2) Morningstar (link)
I also check the number of stars Morningstar gives the company I'm interested in. I try to buy companies with 3 stars or more as that'd indicate Morningstar is rating the company fair value or better. Morningstar also conveniently provides a fair value estimation of the company when you search for a company and click on the 'Company Profile' tab.
3) Value Line (link)
When I get the chance, I head to my local library to access Value Line. Other than glancing over their selections and opinions, I also read the analysis of the companies I'm interested in or already own.
4) Finviz (link)
For the record, when you look up a company on Finviz, it provides its earnings per share [EPS] for this year, and the EPS estimate for the next 5 years.
Both FAST Graphs and Value Line gives an estimation of total returns for the near future. FAST Graphs estimates for the next 5 years. Value Line gives an estimation of a return range between the 3 - 5 year range.
B) Desired Dividend Yield (Range)
Preferably, companies on my watchlist have been growing their dividends for at least the past decade. Comparing the company's current dividend yield to some sort of historical yield metric also helps me determine whether the company maybe a good buy or not at the current price.
1) YCharts - Dividend for Past 10 Years
I use YCharts to look at the past 10 years of dividend yield.
Using IBM as an example, its yield is in the higher end of the decade's range. So, an investor having IBM on their watchlist can take note of that as a plus 1 for the company.
2) Seeking Alpha - Current yield to 5-year yield
Creating a portfolio on Seeking Alpha, one can easily click on the "Dividends" tab to compare the 5-year average dividend yield and the current dividend yield.
For example, investors seeking higher current income might consider buying shares of the Southern Company (NYSE:SO) and Wisconsin Energy (NYSE:WEC) because their current yields are higher than their 5-year average dividend yields.
3) Chowder Rule: 5 year dividend growth + current yield >= 12% (8% for Utilities)
Chowder, a member of the Seeking Alpha community, who contributes his ideas via his blogs uses this rule as one of the criteria for buying. The addition of the 5-year dividend growth and the current yield must be 12% or higher. Each investor can decide for his or herself how big that percentage needs to be, for the dividend income to grow fast enough such that the end result will meet their portfolio goals.
4) Annual Dividend Growth
I create a spreadsheet which records the dividend a company pays. For instance, since 2008, McDonald's have been raising its dividend in the 4th quarter (Q4). So, my spreadsheet would record every dividend paid in each Q4 so that I can see the dividend growth from the previous dividend. Glancing down the column, I get an idea of the company's dividend growth history.
5) Watchlist based on Desired Yield
In my Google Drive, I created a spreadsheet which dynamically updates the ticker price, yield, and action of "WATCH" or "BUY" based on your desired yield. Basically, all you need to do is to set your watchlist of companies once, and update your desired yield as needed.
Here's my sample spreadsheet, showing my Watchlist based on Desired Yield. It consists of Royal Bank of Canada (NYSE:RY), Realty Income (NYSE:O), Omega Healthcare Investors (NYSE:OHI), Exxon Mobil (NYSE:XOM), Coca-Cola , Wells Fargo (NYSE:WFC), Colgate-Palmolive (NYSE:CL), CSX (NASDAQ:CSX), Ross Stores (NASDAQ:ROST), Wal-Mart (NYSE:WMT), Target, IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Qualcomm (NASDAQ:QCOM).
The formulas are as follows. Update the ticker and stock exchange to your needs.
|Column||US Example||Canadian Example|
|Price||=GoogleFinance("XOM", "price")||=GoogleFinance("RY.TO", "price")|
|Current Yield (calc)||=REGEXextract(REGEXreplace(index (importhtml("www.google.com/finance?q=NYSE%3AXOM";, "table", 2), 1, 2); ""; "") ; "/([^/]*)")||=REGEXextract(REGEXreplace(index (importhtml("www.google.com/finance?q=TSE%3ARY";, "table", 2), 1, 2); ""; "") ; "/([^/]*)")|
|Current Yield 1||=TRUNC(C2,2)||=TRUNC(C2,2)|
|Current Dividend||=REGEXextract(REGEXreplace(index (importhtml("www.google.com/finance?q=NYSE%3AXOM";, "table", 2), 1, 2); ""; "") ; "([^/]*)/")||=REGEXextract(REGEXreplace(index (importhtml("www.google.com/finance?q=TSE%3ARY";, "table", 2), 1, 2); ""; "") ; "([^/]*)/")|
|Action2||=IF(D2>F2, "BUY", "WATCH")||=IF(D2>F2, "BUY", "WATCH")|
1 This column is needed to get the "Action" column to update dynamically based on if current yield is greater than desired yield.
2 This column basically says: If Desired Yield > Current Yield, print "BUY". Else, print "WATCH". Replace "D2" with the cell that contains the desired yield for a company. Replace "F2" with the cell that contains the current yield for the same company.
Note: At any time, my spreadsheet and these formulas may fail to work if Google decides to update its web page structure.
C) Technical Analysis
I use simple technical analysis as a last step of my process only after the company passes the valuation and desired yield range from the previous 2 steps. The technical analysis may affect my actions in that I wait to buy or buy immediately.
Finviz only shows the daily charts with technical lines such as the moving averages, channels, and triangles. So, checking this chart will be my last step to determine whether to buy something, or wait and watch if it seems like a downward channel is continuing or a moving average is being broken.
2) Seeking Alpha Moving Averages
Seeking Alpha provides the 10-day, 50-day, and 200-day moving averages.
If the current price is below at least 2 of the moving averages, it increases my odds of buying. My latest lesson in this is that I bought Target at above all those averages because I didn't perform this step. But of course, it could be a coincidence that Target pulled back after I made my purchase. Anyhow, performing this step might help in controlling emotions or buying after a run up. But of course, valuations trump this.
In this article, I created a list of resources for checking valuations, determining the desired yield range, and incorporating simple technical analysis with the goal of determining the maximum price you're willing to pay for a company. Setting this target buy price in a Finviz portfolio allows you to quickly glance through it to determine which company maybe your next buy.
I use 3 main resources to check valuations and fundamentals: FAST Graphs, MorningStar, and Value Line. I use a combination of current yield, past dividend history, and expected dividend growth in the near future to determine my desired yield for a company. Using resources such as YCharts, SeekingAlpha, and Chowder's Rule help me determine my desired yield. Using a Google spreadsheet, I'm able to set up a watchlist which gives me an action of "BUY" or "WATCH" by comparing the current yield with my desired yield. Conveniently, Google updates the price, yield, and action dynamically.
Finally, I use simple technical analysis as the last touch.
I plan to refer back to this list of things to do before buying a dividend growth company. I hope others would find this list useful as well.
Disclosure: I am long IBM, KO, MSFT, QCOM, ROST, TGT, WFC, WMT. 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. I'm long RY on the Toronto Stock Exchange.