A Dividend Champion Portfolio for August

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. 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. The list 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.

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.

Last month I had significant misgivings about Universal. The stock has held up relatively well in the interim but is not projected to have earnings next year and earnings growth was negative this year. Its cash flow from operating activities was less than the dividends paid for the year ending March 31st, 2011. Its status as a Dividend Champion could be in jeopardy, which may explain why it trades at a high yield and low payout ratio (the payout ratio below is not based on projected earnings). Thus, I tweaked the system to exclude stocks that do not have projected forward earnings. Adding this requirement still will not tell the entire picture of any one company, but it could help eliminate stocks with the potential to reduce future dividends.

I began tracking the portfolio in December and as of August 5th it is up 7.15% including dividends. For August 5th, the portfolio sold Questar (NYSE:STR), and used the proceeds to purchase Tompkins Financial (NYSEMKT:TMP). As of August, I will now be using closing prices to calculate buy/sells in order to simplify the portfolio tracking process.

Tompkins is a regional bank which currently yields 3.56% with a payout ratio of 42.56%. It actually finished last week up 1.07%, a reassuring sign for investors who saw nearly all stocks suffer losses last week. The stock is a low volatility financial that could potentially weather a volatile stock market more adeptly than some other financials.

On Thursday I stated that "given that the S&P 500 is now below its 200 day moving average I would tread lightly, easing into new positions until the long-term trend reverses itself". This applies to the Dividend Champion portfolio as well. I would never feel comfortable holding 100% of my capital in equities regardless but when the long-term trend has reversed itself additional caution is warranted.

Below are the top 12 Dividend Champions using the ranking methodology detailed above:

Company Ticker Yield Payout Yield/Payout Ratio
AT&T Inc. T 5.88 50.00 0.118
Community Trust Banc. CTBI 4.57 52.99 0.086
Cincinnati Financial CINF 5.85 70.48 0.083
Tompkins Financial Corp. TMP 3.56 45.71 0.078
Consolidated Edison ED 4.56 64.34 0.071
RPM International Inc. RPM 3.98 57.93 0.069
Kimberly-Clark Corp. KMB 4.28 66.04 0.065
WGL Holdings Inc. WGL 3.99 61.75 0.065
Johnson & Johnson JNJ 3.52 54.55 0.065
MGE Energy Inc. MGEE 3.65 56.62 0.065
Sysco Corp. SYY 3.40 53.06 0.064
Abbott Laboratories ABT 3.74 58.54 0.064
Click to enlarge

Disclosure: None

Disclaimer: No current positions in stocks mentioned. Please note that Scott's Investments is not a financial adviser. Please consult your own investment adviser before making any investment decisions.