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I've developed a very simple process for prioritizing the "Best of the Best" dividend stocks using David Fish's Dividend Champion Spreadsheet. (Thank you, David!)

First, in David's words:

"Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. 'CCC' refers to the universe of Champions, Contenders, and Challengers."

I'm going to focus on true dividend champions with 25+ year streaks. Don't worry, because you can still use this simple process with all "CCC" stocks. I just like to use the Champions because they have the very best track record and it narrows my focus.

Choosing The Data

Next, I simply use the data available. Specifically, I use these 9 columns of data:

  1. Chowder
  2. Tweed
  3. Div Yield
  4. EPS % Payout
  5. Past 5 Years Div Growth
  6. A/D Ratio
  7. Payback Years
  8. Price Above Low
  9. Confidence Factor

David's spreadsheet provides you with a load of useful notes but I still want to explain why these 9 columns of data matter. I want to look one level deeper, beyond the numbers.

Chowder = The combination of current yield and 5 year dividend growth rate. The higher the number the better. I think of this as dividend yield "trend strength" and its relative strength to all other dividend yields. Tells me where I'm starting but also provides a moderate level of predictive power based on history. (Thank you, Chowder.)

Tweed = The combination of a stock's dividend yield and dividend growth rate to its price/earnings ratio. The reason why I like it is because it's a fast and dirty way to view the current dividend in relation to the price of the stock, plus it's conservative. (Thank you, Norman Tweed.)

Dividend Yield = Maybe this is too obvious but the dividend yield is what you expect to get in return for your investment in real cash, on a regular schedule. The importance here is that the bigger the yield, the bigger the return. Cash flow, baby!

EPS % Payout = I actually tried using FCF % Payout to be conservative but too many data points are "N/A" so I opted for EPS. In any event, I like this data because the lower the payout the safer the dividend. Safety is strength. The lower the EPS % payout, the better.

Past 5 Years Div Growth = Quickly tells me if the growth is there, or not. Higher is generally better although super high rates cannot be sustained.

A/D Ratio = Simply put, this is a calculation of the acceleration or deceleration of the 5-year vs. the 10-year dividend growth rate. The higher the number the better because it means that as time goes on, greater and greater amounts of money are being delivered.

Payback Years = How quickly the dividends, and the dividends alone, pay for your initial investment. The higher the number the faster, and the better.

Price Above Low = I'm looking to buy near 52-week lows because I like to get a bargain. This also is a simple proxy for a margin of safety. The lower the number the better, because it means I'm closer to buying at a bottom. Oh joy!

Confidence Factor = This is the most complicated and mysterious value but it's a wonderful combination of various fundamental factors, trends, and more. I like it because it provides me with confidence in the dividend but also the business. The higher the number, the better.

I went through those factors to make it clear why these factors matter. I'm not trying to convince you that one factor is better than another. I also know there's overlap between several factors, and there are other reasons it's not clean. But, in combination, these factors allow us to find the October Super Dividend Champions.

The Process Explained

What I do is insert 10 new columns based on the 9 factors described above and I also add a 10th column that sums the values together. I don't use any fancy pants weighting, but you could if you wanted. Every factor is equally important although you could argue that some data is more important.

Then, you just need to rank order all the dividend champions based on the summation. Here's what it looks like:

(click to enlarge)Super Dividend Champions (October 2013)

If you want to cut to the chase, simply look at the "S" column on the far right. That's the rank ordered summarized data. The higher the number the stronger the company based on all the factors outlined above.

Let's think about all this.

We're looking at just 105 companies that are already Dividend Champions. So, there's already a baseline of incredible strength.

Next, at the top of this list, we're seeing companies that pay more, carry a bit less risk, and currently enjoy a discount relative to peers. However, this doesn't mean that these companies pay the most, or enjoy zero risk or are the cheapest in relation to the overall market.

(There are always cheaper stocks available in the market. Price is what you pay, but what value are you really getting?)

So, to summarize, the simple chart above is a combination of factors that I think we all care about at some level. And, the process rapidly -- and rationally -- narrows our focus to the best of the best right now.

True Value of This Process

This is a starting point only. You have to decide for yourself if all these factors matter or if you want to add (or subtract) other factors.

More importantly, you should perform your own due diligence. Remember...

  • We're not looking for cigar butts.
  • We're not reaching for yield.
  • We're not trying to time the market.
  • We're not trying to find the "best" company.
  • We're not even trying to find the absolute best deal.

Instead, we're trying to narrow our focus down to the best of the best companies that have paid and grown dividends for 25 years or more. We're trying to compare them to each other. We're trying to figure out who deserves attention and who does not. In short, this is a simple way to rationally sort dividend champions at the start of October 2013.

That said, you can use this process at any time. Although much of the data doesn't change, the yields change every second because prices change (although true value changes much slower). But, that's a topic for another article.

What Next?

Word to the wise... Despite the juicy rank ordering of the Super Dividend Champions above, some of these Super Dividend Champions are fairly valued, under valued, or overvalued.

If you're trying to narrow your focus down even more, Chuck Carnevale's F.A.S.T. Graphs give you a taste of at-a-glance speed.

What do you think about Target (TGT), Aflac (AFL) and Donaldson (DCI)?

(click to enlarge)

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Remember, nothing can replace due diligence. Nothing.

Source: Super Dividend Champions (October 2013)

Additional disclosure: I may initiate a long position in TGT in the next 72 hours.