A High Yield Dividend Champion Portfolio for June

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 |  Includes: CINF, CTBI, ED, GPC, JNJ, KMB, MGEE, NWN, RPM, STR, SYY, T, UVV, WGL
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 April 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. This can create high turnover and I do not believe it most accurately captures the yield and payout.

Therefore, beginning In May I transitioned 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 are 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 (to limit turnover) and are replaced with the next highest rated stock.

I began tracking the portfolio in December and to date it is up 8.45% including dividends. For June 7th, the portfolio will sell Sysco Corp (NYSE:SYY), which has been a holding since December. With the proceeds, the portfolio will purchase Cincinnati Financial (NASDAQ:CINF), which was held in the portfolio earlier this year.

Sysco is being sold because its yield dropped below the top third highest yielding stocks in the Dividend Champion list. The company still has reasonable dividend to payout ratio (.061) and a yield in excess of 3%. Its payout ratio of 53% is reasonable. However, when compared to Cincinnati Financial, CINF yields 5.3% and a payout ratio of 70%.

The technician in me is worries that purchasing CINF now may be premature. However, since this is a rules based strategy the goal is to remove emotion from the investing process. CINF has seen recent insider purchases, with the CEO recently purchasing over $781,000 in shares at $30.05. For the patient investor, CINF may be available at a deeper discount if financials continue to slide. However, we will be purchasing shares in this hypothetical portfolio on June 7th.

This month's top 13 qualifying stocks are below (data below as of beginning of the month, 13 included on the list because of a tie for 12th place), ranked in order of their ranking. Current portfolio positions highlighted in green. Last month's portfolio can be seen here.

Data courtesy of Finviz. and DRIP Investing.

Company Symbol Ratio Yield Payout
Universal Corp. UVV 0.127 4.55 35.89
AT&T Inc. T 0.111 5.45 49.00
Community Trust Banc. CTBI 0.084 4.44 52.59
Questar Corp. STR 0.084 3.52 42.07
Cincinnati Financial CINF 0.075 5.26 70.48
Consolidated Edison ED 0.070 4.52 64.34
Johnson & Johnson JNJ 0.066 3.39 51.70
Kimberly-Clark Corp. KMB 0.064 4.10 63.64
WGL Holdings Inc. WGL 0.064 3.95 61.75
MGE Energy Inc. MGEE 0.064 3.60 56.62
RPM International Inc. RPM 0.059 3.57 60.87
Northwest Natural Gas NWN 0.058 3.85 66.41
Genuine Parts Co. GPC 0.058 3.28 56.78
Click to enlarge

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