April High Yield Dividend Champion Portfolio

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 |  Includes: CINF, CTBI, CVX, EFSI, MCD, MO, ORI, PEP, T, TGT, TMP, UVV, WEYS, WMT, XOM
by: Scott's Investments

The High Yield Dividend Champion stock portfolio has been updated for April. The portfolio is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott's Investments.

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.

To date, the portfolio is up over 85%. I mentioned in the 2013 year in review that valuation of high yield stocks was a concern. In January's update I noted that "I have lowered my expectations for future returns of US equities and high yield stocks." I added a valuation filter to the portfolio starting in 2014. We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively "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 price-earnings (P/E) ratio. 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.

There is turnover in one position this month. Helmerich & Payne Inc. (NYSE:HP) was sold for a capital gain of 63%+ and an original purchase date of 7/5/13. The yield for HP has dropped below the minimum threshold as a result of its significant price increase in recent months. Old Republic International (NYSE:ORI) replaces HP. It is currently ranked fourth using our ranking methodology.

The portfolio has now grown to a point where rebalancing positions is a concern. The sale of HP generated over $30,000 in a $187,000+ portfolio. The question becomes whether we put all of the proceeds into the new position, ORI, making it the largest holding, or allocate to both ORI and existing positions for a more balanced allocation. The original portfolio allocated evenly among 10 positions. It is intended to be a real-world example of a mechanical investing system, so I have not rebalanced to this point to keep potential real-world fees and taxes to a minimum.

Given the size of the HP transaction, now would be an optimal time to balance the system. To keep commissions and taxes to a minimum, I will not be selling any other positions in the portfolio. Rather, we will use cash generated from HP to allocate approximately 10% of the portfolio to ORI, and we will purchase additional shares of the portfolio's 4 smallest holdings - Chevron (NYSE:CVX), Altria (NYSE:MO), Universal Corporation (NYSE:UVV), and Tompkins Financial Corporation (NYSEMKT:TMP).

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

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.36 36.10 11.15 10.73
AT&T Inc. T 5.25 54.12 2.33 10.31
Universal Corp. UVV 3.65 39.08 2.08 10.71
Old Republic International ORI 4.45 47.40 1.43 10.65
Eagle Financial Services OTCQX:EFSI 3.30 36.19 3.27 10.95
Tompkins Financial Corp. TMP 3.27 46.11 5.03 14.11
McDonald's Corp. MCD 3.31 58.38 11.35 17.66
ExxonMobil Corp. XOM 2.58 34.19 12.24 13.25
Altria Group Inc. MO 5.13 84.96 8.23 16.56
Community Trust Banc. CTBI 3.09 44.44 1.49 14.40
Wal-Mart Stores Inc. WMT 2.51 39.59 15.27 15.76
Cincinnati Financial CINF 3.62 56.23 1.19 15.55
Target Corp. TGT 2.84 55.84 23.44 19.65
Weyco Group Inc. WEYS 2.66 44.44 4.13 16.68
PepsiCo Inc. PEP 3.14 60.65 6.39 19.33
Click to enlarge

The current re-balanced portfolio is below:

Position Shares Average Purchase Price Initial Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
CVX 138 108.06 12/6/2012 $14,912.28 $16,394.40 9.94%
MCD 167 96.54 1/3/2014 $16,122.18 $16,344.29 1.38%
ORI 1145 16.22 4/4/2014 $18,571.90 $18,571.90 0.00%
UVV 332 46.47 4/5/2012 $15,428.04 $17,781.92 15.26%
TGT 321 55.07 2/5/2014 $17,677.47 $19,625.94 11.02%
CINF 375 47.1 2/5/2014 $17,662.50 $18,071.25 2.31%
XOM 196 89.01 4/5/2013 $17,445.96 $19,082.56 9.38%
MO 449 34.64 3/5/2013 $15,553.36 $16,868.93 8.46%
T 663 32.34 3/6/2014 $21,441.42 $23,569.65 9.93%
TMP 362 50.16 1/3/2014 $18,157.92 $17,759.72 -2.19%
Click to enlarge

$3613 will be kept in cash in case rebalancing is needed in the near future.

Disclosure: No positions