I write extensively on the U.S. Dividend Champion list maintained and updated by DRIP Investing. The list is comprised of stocks which have increased their dividend payout for at least 25 consecutive years. My initial Dividend Champion articles on Scott's Investments focused on one or two company metrics, such as payout ratio, yield, or past performance.
However, I now regularly combine multiple metrics to create an overall quantitative ranking for stocks in the list. This article uses a simple quantitative system which combines multiple metrics to give an "overall" rank of the stocks within the March U.S. Dividend Champion list.
This ranking system is the most comprehensive yet, combining Dividend Yield, Payout Ratio, Forward Price/Earnings, Return on Equity, Total Debt/Equity, and price momentum (as calculated by the average return over the past 3, 6 and 12 months). I required the stock be yielding at least 2% in order to qualify for inclusion. This differs from previous systems in which a 3% yield was required. The rationale for lowering the yield threshold was to determine if high quality stocks with a reasonable yield were being omitted from previous rankings.
Historical tests have shown that stocks with higher yields and lower payout ratios, as well as those with higher yields and higher price momentum, have tended to outperform other stocks.History is not a guarantee of future performance. However, I believe it provides a basic foundation for research and further due diligence. Starting with the 99 stocks on March's Dividend Champion list, which was reduced further to the 71 stocks yielding at least 2%, the top 10 stocks based on Dividend Yield, Payout Ratio, Forward Price/Earnings, Return on Equity, Total Debt/Equity, and price momentum are below. Equal weight was given to each metric.
This list of 10 high-quality dividend stocks with a strong history of dividend growth is an excellent list from which to make investment decisions. It is important to note that quantitative analysis can capture a significant amount of data. However, forward P/E ratios and projections of a company's earnings growth is an essential component of an investment decision and one that is not always easily captured in creating a ranking system. For example, AFLAC (NYSE:AFL) does a significant portion of its business in Japan. Given the recent disaster, AFL's potential claims and earnings growth remain in question and caution is urged for risk-adverse investors.
We declared last week "Do or Die Week" for equities and gold. Given that equities sold off and broke below the highlighted intermediate support levels, there could be further weakness in the intermediate term. Thus, patient investors may find some of these names at a further discount in the coming weeks. For long-term investors, averaging into positions by spreading out purchases over time is one option for reducing price risk in the short-intermediate term.
|Ticker||Company||Forward P/E||Dividend Yield||Payout Ratio||Return on Equity||Total Debt / Equity||Momo Rank|
|JNJ||Johnson & Johnson||11.42||3.69%||43.50%||24.88%||0.3||14|
|XOM||Exxon Mobil Corp.||9.86||2.18%||28.00%||23.43%||0.1||16|
|MHP||The McGraw-Hill Companies, Inc.||12.16||2.64%||35.17%||40.82%||0.54||6|
|WMT||Wal-Mart Stores Inc.||10.56||2.83%||28.64%||22.09%||0.73||18|
|CB||The Chubb Corporation||10.08||2.69%||21.16%||13.95%||0.26||37|
|MO||Altria Group Inc.||11.32||6.13%||78.28%||84.01%||2.35||3|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.