I'm a huge football fan and in the spirit of gridiron combat, I am going to put together a Dividend Portfolio Super Bowl consisting of the top twelve performing stocks in my dividend portfolio. Each team will be going head to head in a bracket and be graded on seven different stock performance metrics in order to move onto the next round. The seven metrics I'll be rating each stock on are the metrics I look for in a stock when I first select it to go into my portfolio. In this article I will explain why I select these metrics for my portfolio and throw out the schedule for you. The only caveat about the teams selected is that I'm not picking Apple (AAPL) because of the scrutiny put on the stock just to make it into an article.
The metrics which the stocks will be judged against in order of importance to me are forward P/E, 1 year PEG ratio, EPS growth next year, dividend yield, return on assets, return on equity and return on investments in that order. I like to pick stocks based on their fundamental values first and then on their financial values. Without further ado, here is the list of the top 12 (13) teams and how they have performed for me thus far.
% Change Incl. Dividend
% of Portfolio
L-3 Communications Holdings, Inc.
Emerson Electric Co.
General Electric Company
The Walt Disney Company
E I Du Pont De Nemours And Co
Dunkin Brands Group Inc.
JPMorgan Chase & Co.
Wells Fargo & Co
* - Not participating in the Dividend Portfolio Super Bowl
Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past.
To use a sports story to help you visualize this, the Los Angeles Lakers recently paid a hefty sum of money to Kobe Bryant for the next couple of years based on what he has done in the past, but what management failed to realize is that Kobe is now injured, has played the 14th most minutes in NBA history, and is on the decline. Kobe is currently the highest paid player in the NBA but has been sitting on the bench for 80% of the season and is expected to be out for the next six weeks. Yes the Lakers will still be selling his jerseys, but how much more money could they be pulling in if they would have opted to wait on that contract renewal and saving that money for a younger big name free agent during the summer?
The moral of the story is to know what you're paying for. For me in the stock world it's the forward P/E ratio. A forward P/E value of fewer than 15 to me is a value stock, and is highly desirable for my dividend portfolio. A value of between 15 and 30 is fairly valued from my perspective and anything above 30 is a no touch for me.
This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however, I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that majority of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone.
In some instances a really high P/E ratio may deter some investors from a stock but when you show how much you are paying with respect to the company's really high growth rate you may get a more compelling story. A 1-yr PEG value of less than 1 to me is a value stock, and is highly desirable for my dividend portfolio. A value of between 1 and 2 is fairly valued from my perspective and anything above 2 is a no touch for me.
EPS Growth Next Year
This metric is really simple, it is essentially taking the difference of the next year's project earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above.
Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings.
Return on Assets
Return on assets is the metric which show how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment.
Return on Equity
Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better.
Return on Investments
ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The higher the ROI value the better.
The thing I noticed while putting this tournament together is that all my industrial goods stocks are some of my top performers. All three industrial stocks managed to gain a first round bye, but I've been under weighted in the industrials in my portfolio. While compiling the list I noticed that all the oil related stocks are near the bottom of the list, this is a result of oil dropping in price obviously. One thought running through my head right now is, "are we about to see reversals in both industries?" I am thinking this thought because if the price of oil picks up then the industrial demand will lighten, taking down the industrial stocks with it. What are your thoughts? Please leave your comments below.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!