February'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.

The Dividend Champions are the starting point and we 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.

For February we sold Emerson Electric (NYSE:EMR) at a one month gain of 11.26% and Johnson & Johnson (NYSE:JNJ), which had been held since 12/6/2010 for a gain of 5.53% (excluding dividends which were $362.25 over the course of holing the stock). The proceeds were used to purchase 270 shares of MGE Energy (NASDAQ:MGEE) and 644 shares of Questar Corporation (NYSE:STR).

The portfolio’s current value is $127946, beginning balance was $100000 on December 6th, 2010.

The portfolio’s equity curve is below, plotted against the SPY (distributions included in both):

Current holdings are below:

The top 18 rated stocks are listed below:

Name Ticker Yield Payout Yield/Payout (E/P)
Pitney Bowes Inc. PBI 7.8 71.15 0.110
Community Trust Banc. CTBI 4.02 49.01 0.082
Tompkins Financial Corp. TMP 3.56 45 0.079
Eagle Financial Services OTCQX:EFSI 3.97 54.96 0.072
Sonoco Products Co. SON 3.71 53.46 0.069
Universal Corp. UVV* 4.37 64.05 0.068
Sysco Corp. SYY 3.59 55.1 0.065
MGE Energy Inc. MGEE 3.41 55.65 0.061
Questar Corp. STR 3.37 55.08 0.061
RPM International Inc. RPM 3.44 56.58 0.061
Consolidated Edison ED 4.1 67.79 0.061
Kimberly-Clark Corp. KMB 3.91 70.18 0.056
Abbott Laboratories ABT 3.55 63.79 0.056
Procter & Gamble Co. PG 3.33 61.76 0.054
WGL Holdings Inc. WGL 3.63 67.98 0.053
California Water Service CWT 3.41 64.29 0.053
Johnson & Johnson JNJ 3.46 65.33 0.053
Clorox Company CLX 3.5 69.16 0.051
Click to enlarge

*no projected forward earnings

Disclosure: No current positions