Dividend Champion Portfolio For September

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 |  Includes: ABT, BKH, CTBI, ED, JNJ, KMB, MGEE, RPM, SON, SYY, T, TMP
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. 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.

As I previously detailed in-depth, 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. Stocks must also have a positive forward projected P/E, to eliminate stocks with no projected earnings for the next year.

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 as of September 2nd it is up 7.39%, including dividends. Starting in August, I use closing prices to calculate buy/sells in order to simplify the portfolio tracking process.

For September 6th, the portfolio is selling Cincinnati Financial (NASDAQ:CINF) and WGL Holdings (NYSE:WGL). The proceeds will be used to purchase RPM International (NYSE:RPM) and Black Hills Corp (NYSE:BKH).

RPM International is a chemicals company with a current yield of 4.51% and a payout ratio of 57.93%. The stock was downgraded on September 1st by Oppenheimer to Underperform. It has a 4.9% and 6.2% dividend growth rate over the past 3 and 5 years. For those interested in adding extra income to an RPM position, the October 20 calls had a bid of $.40 on Friday, providing an additional 2.1% of downside protection.

Black Hills Corp is an electric utility currently yielding 4.83% and a payout ratio of 71.22%. The stock has shown low volatility and also low historical dividend growth. It has averaged dividend growth of 1.7% and 2.4% over the past 3 and 5 years.

Below are the top 12 Dividend Champions using the ranking methodology detailed above, using month-end data:

Click to enlarge

Company

Symbol

Covered Calls

Dividend Yield

Payout

NY Est EPS

AT&T Inc.

T

Here

6.04

50.00

2.55

Community Trust Banc.

CTBI

Here

4.91

52.99

2.47

Tompkins Financial Corp.

TMP

Here

3.71

45.71

3.50

Sysco Corp.

SYY

Here

3.72

53.06

2.25

RPM International Inc.

RPM

Here

4.03

57.93

1.91

Black Hills Corp.

BKH

Here

4.77

71.22

2.27

Consolidated Edison

ED

Here

4.27

65.93

3.70

MGE Energy Inc.

MGEE

Here

3.63

56.68

2.70

Johnson & Johnson

JNJ

Here

3.47

54.55

5.29

Sonoco Products Co.

SON

Here

3.67

58.29

2.74

Abbott Laboratories

ABT

Here

3.66

58.54

4.99

Kimberly-Clark Corp.

KMB

Here

4.05

66.04

5.27

Click to enlarge

Disclaimer: No current positions in stocks mentioned. Please note that Scott's Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott's Investments.