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Summary

  • 2014 finds an increasing number of overbought dividend stocks.
  • This can present a real challenge to new self-directed investors.
  • Part Two of this series explores the important question: Should recently retired investors build their portfolio in the current environment?

Welcome back to Part Two of this important series. You will remember we started in Part One with the following assumption: It's 2014, you just retired and after listening to the suggestions of advisors connected to your 401ks, you decided perhaps it was time to manage your own accounts and join the growing number of self-directed investors. You discovered Seeking Alpha and found that you particularly enjoyed the articles written about actual self-managed portfolios. You also discovered that many of these writers favored an approach to distribution-phase investing known as Dividend Growth.

For folks retiring in 2014, this presents a particularly challenging time to build a dividend growth portfolio. By now many of you may have already begun and know of its difficulty firsthand.

You've started with the decision that the dividend approach to investing is right for you, particularly since you are risk-averse in your approach to investing. You completed a business plan using the framework provided here to help guide your buying and selling decisions.

You set an initial yield on cost of 4%-plus from your portfolio value. You have decided to limit your holdings to Dividend Champions, Contenders and Challengers with a history of being Recession-Proven. For an additional list of some of the best Recession-Proven stocks, click here.

You also decided that your selections needed to provide a margin of safety. So you set a minimum yield for purchase of 2.75%, roughly 1.5 times the yield for the S&P 500 Index.

You downloaded your copy of the Dividend Champions here and discovered that as of August, there were a total of 540 stocks reflected in the lists above. There were 106 Dividend Champions, of which 47 have a current yield of 2.75% or more. Of these only 10 -- 10% of the total -- currently satisfy the total dividend return or "chowder" rule after the Seeking Alpha contributor who writes under the name Chowder. This rule states that yield plus average 5-year Dividend Growth Rate or DGR equal 12. An exception is made for higher yielding slower growing utilities, tel-cons and REITs.

You know from your readings on Dividend Growth investing the importance of not overpaying for a new position. Ideally purchases should be made when stocks are unvalued. Of the 10 Champions providing your preferred margin of safety, none appeared to be currently unvalued. The 10 discussed in Part One do appear to be fairly valued.

Now we focus on the Dividend Contenders that satisfy the chowder rule and seem to suggest the margin of safety you're looking for. Dividend Contenders are a select group of stocks that enjoy 10-24 years of sustained and growing dividends. I like to think of them as the Champions of Tomorrow. As a group they enjoy higher yield, higher average 5-year dividend growth and higher estimated 5-year earnings growth than the Dividend Champions. On average, they have survived two bear markets with their dividends intact and growing. There were 103 Contenders yielding 2.5% or more. The average yield for this group was 3.70%.

Of this group of 103, 50 satisfied the total dividend return or "chowder" rule described above. There are 21 believed to be at fair or better value. The average yield for this group is 4.18%. As a group, they enjoy 5-year DGR of 12.51% and 5-year estimated earnings growth of 8.14%.

As a group, they deserve your due diligence.

Stock

Ticker

Yield %

5- Year

DGR

%

10-Year

Ave Return

5-year

Est. Growth

Alliance Resource Ptr.

ARLP

4.94

12.5

17.76

14.8

Alliant Energy

LNT

3.49

6.1

10.97

4.7

Am. Gas Partners

APU

7.61

5.6

9.97

5.9

Avista Corporation

AVA

3.91

12.1

8.71

5.0

Conoco Phillips

COP

3.60

13.3

13.25

6.7

Cracker Barrel

CBRL

3.98

27.6

13.37

9.8

General Mills

GIS

3.04

20.0

3.18

6.9

Genesis Energy.

GEL

4.06

11.5

19.96

30.3

Hasbro

HAS

3.27

15.8

12.83

10.5

Lockheed Martin

LMT

3.06

21.2

14.09

9.4

Meredith Corp.

MDP

3.71

13.6

1.29

15.0

Stock

Ticker

Yield %

5 Year

DGR

%

10 Year

Ave Return

5 yr

Est. Growth

New Jersey Resources

NJR

3.22

12.2

9.07

3.6

Occidental Petro.

OXY

2.8

15.2

16.45

6.2

Northeast Utilities

NU

3.42

12.2

11.26

1.2

Reynolds American

RAI

4.58

7.5

15.03

8.1

Shaw Communication

SJR

3.93

9.7

9.87

3.7

Syngenta.

SYT

3.16

2.9

9.25

4.2

Southern Co.

SO

4.73

13.9

15.49

7.2

Vector Group

VGR

6.70

5.0

13.53

11.0

Williams Companies

WMB

3.77

43.6

21.03

6.2

Williams Partners

WPZ

6.92

8.8

28.19

10.5

Average Totals

4.18

12.51

19.63

8.14

In Part Three, we'll explore the Dividend Challengers. If you are new to or have an interest in learning more about dividend investing, I would ask that you consider becoming a follower in order that you not miss Part Three of this important series.

Now it time to hear from you. What are your thoughts about using the metric of total dividend return? What are your thoughts about "Tomorrow's Champions"?

Source: Can A Successful Dividend Portfolio Be Assembled In 2014? - Part 2