# Dividend Champions Smackdown XVIII: The Tweed Factor

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Includes: ARLP, AVA, DUK, GTY, HCSG, HEP, HGIC, INTC, LMT, MCHP, MO, NUE, NVS, RAI, SJR, T, WPZ
by: David Fish

In previous installments of the Smackdown series, I have screened the Dividend Champions (which can be found here) using factors such as yield, payout ratio, and dividend growth rate. Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. “CCC” refers to the universe of Champions, Contenders, and Challengers.

This month, I focused on two new columns that were added in the latest update – columns AI and AJ, which show the percentage by which the current price (as of August 31) varies from each stock's 50- and 200-day Moving Averages. That article can be found here.

I usually don't do more than one Smackdown per month, but was intrigued by the comments at the end of a recent article by SA Contributor Norman Tweed (see here). As many readers may already know, Norm espouses a modification of the Gordon Model that simplifies his search for worthy Dividend Growth candidates to meet his personal requirements, which include a minimum 4% yield. He also uses a shortened formula that requires a stock's price/earnings ratio to be less than the sum of the yield and the 5-year dividend growth rate.

Critics might say that this adds “apples and oranges” in that one is a current rate and the other is a rate of change, but the “short-hand” formula seems to work as a conservative hurdle. It also has an advantage over the original Gordon Model in that it does not require the input of estimates, but rather relies on historical (proven) DGRs (dividend growth rates) and current (baseline) yield. For want of a better name, I'll call this the Tweed Factor and, for the purposes of this Smackdown, I inserted a column that added the yield and 5-year DGR and subtracted the P/E, which I labeled TF. To find out which CCC companies might qualify, I combined all three groups and screened as follows:

Step 1: After eliminating companies that had not increased their dividend in more than a year and those that had agreed to be acquired, I also deleted any that had “n/a” or negatives in the P/E or 5-year DGR (Dividend Growth Rate) columns. That cut the list from 452 companies to 375 initial candidates.

Step 2: Sort the companies by their TF (Tweed Factor), high to low. Eliminating those that were not positive cut the field to 151 companies.

Step 3: Sort the companies by their current yield, high to low. Meeting Norm's 4% yield threshold were 28 companies. (If the threshold were lowered to 3%, then 61 companies would qualify and, if it were lowered to 2%, 109 companies would make the cut.) But I was concerned about sustainability and wanted to trim the field to a more manageable size.

Step 4: Sort the companies by their Next Year and 5-year estimated earnings per share growth rates. (Columns AC and AD) I eliminated any that had “n/a” or negative expectations. At this stage, there were still 89 companies yielding more than 2%, 43 above 3%, and 17 above the 4% threshold. Those 17 appear below.

Note that I've sorted all tables back into alphabetical order

 No. 8/31 TTM NY% Est 5-yr DGR Company Symbol Yrs Price Yield P/E Growth Growth 5-yr TF* Alliance Resource LP (NASDAQ:ARLP) 9 71.87 5.13 9.80 7.4 9.9 15.3 10.6 Altria Group Inc. (NYSE:MO) 43 27.19 6.03 16.58 6.9 6.5 14.8 4.3 AT&T Inc. (NYSE:T) 27 28.48 6.04 8.28 7.1 5.7 5.4 3.2 Avista Corp. (NYSE:AVA) 9 25.38 4.33 14.10 7.5 4.9 12.9 3.1 Duke Energy Corp. (NYSE:DUK) 7 18.91 5.29 12.28 2.2 3.5 7.4 0.4 Getty Realty Corp. (NYSE:GTY) 11 19.01 10.10 11.45 1.9 4.3 1.8 0.5 Harleysville Group (NASDAQ:HGIC) 25 28.67 5.30 16.20 119.1 8.1 14.7 3.8 Healthcare ServicesGp (NASDAQ:HCSG) 9 15.68 4.05 29.58 20.3 18.3 37.2 11.6 Holly Energy Partners (NYSE:HEP) 7 50.70 6.82 20.36 7.8 5.4 22.8 9.3 Intel Corp. (NASDAQ:INTC) 8 20.13 4.17 9.23 4.2 11.0 14.5 9.4 Lockheed Martin (NYSE:LMT) 8 74.19 4.04 9.29 16.8 9.5 20.2 15.0 Microchip Technology (NASDAQ:MCHP) 10 32.81 4.23 15.12 6.1 10.3 24.9 14.1 Novartis AG (NYSE:NVS) 10 58.46 4.02 13.79 3.9 5.1 18.2 8.4 Nucor Corp. (NYSE:NUE) 38 36.08 4.02 24.38 35.8 12.1 36.9 16.5 Reynolds American (NYSE:RAI) 7 37.57 5.64 16.33 6.8 8.5 11.9 1.2 Shaw Communications (NYSE:SJR) 9 22.82 4.03 19.50 9.9 10.5 47.2 31.8 Williams Partners LP (NYSE:WPZ) 7 54.18 5.41 12.93 2.8 7.2 78.0 70.5

*Tweed Factor

Conclusion

It should be noted that Getty Realty has been the object of some recent discussion that its distribution may be in danger, and that is indicated by its yield of over 10%, a good reminder that it's often dangerous to reach too far to achieve yield. Also note that the payout ratio for Master Limited Partnerships (MLPs) and Real Estate Investment Trust (REITs) often exceed 100% of earnings, due to the lack of corporate taxation and the “non-qualified” nature of their distributions. Also note that foreign firms, such as Novartis, may trigger a withholding tax that can't be claimed as a tax credit if the shares are held in a retirement account.

This Smackdown showed that even companies with generous yields can offer potential investors the possibility of future growth prospects. Keep in mind that growth estimates and other numbers are subject to change and that attractive prices can disappear quickly. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long MO, T, DUK, INTC, LMT.