November High Yield Dividend Champion Portfolio

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.

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 (the same as a trailing earnings/price ratio, or the inverse of the trailing P/E 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.

As of November 4th the portfolio is up 18.43% since its inception less than a year ago. For November 4th the portfolio sold AT&T (NYSE:T) due to its payout ratio exceeding the lowest of the Dividend Champion stocks. T was an original holding in the portfolio, first purchased on 12/6/10. It was replaced by Mercury General Corporation (NYSE:MCY). MCY engages in writing private passenger and commercial automobile insurance. At month-end its yield was 5.64% with a 70.72% payout ratio. It has a low debt/equity ratio of .14 and has a forward projected P/E of 16.08.

Below are the top 17 Dividend Champion using the method detailed above, with the exception of the forward/earnings requirement. The top stock on the list, Universal Corp (NYSE:UVV), has no projected forward earnings so it is not a holding in the portfolio:

Company Symbol Yield Payout Yield/Payout
Universal Corp.* UVV 4.48 36.78 0.122
Community Trust Banc. CTBI 4.38 49.80 0.088
Tompkins Financial Corp. TMP 3.65 45.71 0.080
Mercury General Corp. MCY 5.64 70.72 0.080
Sysco Corp. SYY 3.75 53.06 0.071
United Bankshares Inc. UBSI 5.05 72.73 0.070
Sonoco Products Co. SON 3.70 53.46 0.069
RPM International Inc. RPM 3.83 56.95 0.067
Johnson & Johnson JNJ 3.54 55.61 0.064
Consolidated Edison ED 4.15 65.93 0.063
MGE Energy Inc. MGEE 3.51 56.68 0.062
Black Hills Corp. BKH 4.33 71.22 0.061
Clorox Company CLX 3.59 59.55 0.060
Kimberly-Clark Corp. KMB 4.02 66.83 0.060
WGL Holdings Inc. WGL 3.62 65.68 0.055
Abbott Laboratories ABT 3.56 66.21 0.054
Conn. Water Service CTWS 3.55 67.86 0.052
*no projected forward earnings
Click to enlarge

Disclosure: No current positions in stocks mentioned.

Disclaimer: Please note that Scott's Investments and its author 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.