December's 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 (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 described 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 December 5th the portfolio is up 20.66% since its inception only one year ago. Over the same time period the SPDR S&P ETF (NYSEARCA:SPY) has returned 4.86% including dividends. For December 5th the portfolio sold Mercury General (NYSE:MCY) and Black Hils (NYSE:BKH) due to payout ratios exceeding the lowest of the Dividend Champion stocks.

The proceeds of the sales were used to purchase Pitney Bowes (NYSE:PBI) and Eagle Financial Services (OTCQX:EFSI). PBI has undoubtedly struggled since this spring, but may be finding a bid in the $17.50-$20 range. At the end of November its yield was 7.94% and payout ratio was 71.15%.

There is a caveat with EFSI - it is a thinly traded over-the-counter stock. It has been added to the portfolio but readers should be aware that the stock has an average volume of less than 5000 shares per day, so trading the stock can be especially difficult. At the end of November its yield was 4.09% and its payout ratio was 58.06%.

If the thin volume of EFSI has you concerned, the next highest ranked stock for this month which is not already in the High Yield Dividend Champion portfolio portfolio is Questar (NYSE:STR).

Below are the top 12 stocks for this month using the rating system highlighted in this article.

Company Symbol Yield Payout%Ratio Ratio
Pitney Bowes Inc. PBI 7.94 71.15 0.112
Community Trust Banc. CTBI 4.40 49.80 0.088
Tompkins Financial Corp. TMP 3.59 45.43 0.079
Eagle Financial Services OTCQX:EFSI 4.09 58.06 0.070
Sysco Corp. SYY 3.78 55.10 0.069
Sonoco Products Co. SON 3.57 53.46 0.067
RPM International Inc. RPM 3.64 56.95 0.064
Johnson & Johnson JNJ 3.52 55.61 0.063
Consolidated Edison ED 4.04 64.69 0.062
MGE Energy Inc. MGEE 3.42 55.65 0.061
Questar Corp. STR 3.37 55.08 0.061
Kimberly-Clark Corp. KMB 3.92 66.83 0.059
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Disclaimer: No current positions in stocks mentioned. 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.