Dividend Champion Portfolio for May

by: Scott's Investments

In December 2010, I created a screen/hypothetical portfolio called the "High Yield Dividend Champion Portfolio." The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott's Investments (see the right hand column for a link to the spreadsheet).

Like many of the screens, strategies, and portfolios I track and prefer, this strategy takes a small number of historically relevant ideas, to create a simple, yet powerful action plan for the individual investor. As I have 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.

This portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to gauge the "best" high yield/low payout stocks.

Through last month my primary method for identifying high yield/low payout stocks was to start with the Dividend Champions list as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years. I then took the top third of Dividend Champions based on yield and sort the results based on the top third with the lowest payout ratio.

The goal is to weigh the odds in our favor that we will be investing in stocks that have historically paid and raised dividends. In addition, we want stocks with a high yield in order to increase income received. Finally, we want to identify stocks paying out a relatively low percentage of earnings as dividends.

I believe there is a limitation to such a simple ranking method like the one detailed above. The concept and goal is solid; however, issues can arise when stocks have payout ratios that fluctuate near the 10th spot on the list. For example, stocks can easily fluctuate around the 10th spot. This can create high turnover and I do not believe it most accurately captures the yield and payout.

Therefore, beginning this month I will begin transitioning to a slightly different ranking methodology. The Dividend Champions are still the starting point and we still begin by ranking the top third highest yielding Champions. With the remaining high yielding stocks, we will eliminate 50% with the highest payout ratio. The remaining stocks will be assigned a rank based on the ratio of their dividend yield to payout ratio. The top 10 stocks based on this ratio 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 12 and are replaced with the next highest rated stock.

This new methodology should not dramatically change the results and does not alter the overall objective of identifying high yield, low payout stocks.

I began tracking the portfolio in December and to date it is up 9.66% including dividends. For May 9th, the portfolio will sell Abbott Laboratories (NYSE:ABT) and McDonalds (NYSE:MCD). With the proceeds, the portfolio will purchase Consolidated Edison (NYSE:ED), currently yielding 4.52%, and WGL Holdings (NYSE:WGL), yielding 4.06%.

This month's qualifying stocks are below (data below as of beginning of the month), ranked in order. Current portfolio positions highlighted in green. Last month's portfolio can be seen here.

Data courtesy of Finviz. and DRIP Investing.

Company Symbol Yield Payout Ratio
Universal Corp. UVV 4.43 35.89 0.123
Questar Corp. STR 3.47 31.94 0.109
AT&T Inc. T 5.53 51.34 0.108
Community Trust Banc. CTBI 4.31 52.59 0.082
Kimberly-Clark Corp. KMB 4.24 62.92 0.067
Sysco Corp. SYY 3.60 53.61 0.067
Johnson & Johnson JNJ 3.47 51.70 0.067
Consolidated Edison ED 4.60 69.16 0.067
WGL Holdings Inc. WGL 3.92 61.75 0.064
MGE Energy Inc. MGEE 3.57 60.02 0.060
Northwest Natural Gas NWN 3.76 63.74 0.059
Genuine Parts Co. GPC 3.35 56.78 0.059
RPM International Inc. RPM 3.57 60.87 0.059
Abbott Laboratories ABT 3.69 64.86 0.057
Sonoco Products Co. SON 3.36 59.18 0.057
Procter & Gamble Co. PG 3.24 57.22 0.057
California Water Service CWT 3.26 67.96 0.048
Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.