Back in January, I started a power ranking over our Dividend Growth Index. The ranking was done purely based on my perception of each stock. Unfortunately, I couldn’t analyze all 24 stocks. This is why the ranking was not fair for all stocks (especially since I didn’t know all of them inside & out).
I’m trying it again this month with a different method. I’m actually rating the 24 stocks according to my secret algorithm (I’m playing Google here). But seriously, I thought of using metrics in order to establish which stocks are « better » than the others. I’m currently building a “stock rating calculator” and wanted to have your feedback on it. This could be an awesome tool to use in the future that would help pick the best stock among those you are considering. Here are the metrics I’ve taken into consideration:
Most Important Metrics
I’ve divided the metrics into two groups. The first group is concentrated on dividend metrics only and has more weight in the ranking calculations. Since I want to build a tool that evaluates the best dividend stocks, it’s only normal to use these metrics as the main factors.
What is more important than dividend yield when you are building a dividend portfolio? Using the dividend yield as one of the main metrics was obvious to me. I don’t want to build a portfolio with low yield, even if the stock is part of the dividend aristocrats. My personal target is over 3%, so the higher the dividend yield, the more points the stock gets.
Dividend Payout Ratio
A high dividend yield is nothing without a low payout ratio. It’s useless to have a 7% dividend yield, with a 150% dividend payout ratio. This is why it is the second metric I follow. My personal target is to be below 70% in most cases with a few exceptions here and there.
The last major factor to be considered is the dividend growth. I don’t only want a high dividend yield combined with a low payout ratio, I also want to make sure that there will be dividend growth over time. This is the most important thing to look at since this is where all the strengths from dividend investing come from. This is how a stock like Coke (KO) will eventually pay you a 6% dividend yield if you are patient enough.
Other Metrics Used
Dividend payouts are certainly a good thing, but I also want to make sure that the company will also be able to maintain and grow its dividend. This is why I’ve added four more metrics that will follow the “business sustainability” over time.
Dividends are paid from profits. So if you want to see dividend payouts increase over time, you need a nice up trend in the profits as well. They are both linked together.
Instead of looking in all financial statement to make sure that the profit generated is not linked to the sale of assets, I also look at revenue growth. A healthy business will show both profit and revenue growth.
The key to dividend investing lies within liquidity. High revenue growth usually leads to high profit growth that leads to dividend growth. One thing that could prevent this formula from working is the level of debt the company has. This is why it’s important to make sure that the company is not financing a part of its dividend (as is the case when you hit a payout ratio over 100%).
The last factor to be considered but not the least is in regards to the current stock evaluation. I’m looking for great stocks but not at any price.
How factors interact with each other
I first started to give points to each factor according to how strong (or weak) they were compared to the rest of my list. However, when a stock had a very weak factor (such as high payout ratio or negative revenue growth), I noticed it wasn’t penalized enough. This is why I came up with the idea of subtracting points for a negative metric. Therefore, if a stock has a very strong dividend yield, it will take more than only this factor to figure on the top of the list.
It’s important to understand that the ranking is given compared to the other stocks in the list. Therefore, if I create three different lists with different stocks; I would get different rankings as well. Here’s what I have for our dividend growth index:
Dividend Growth Stock Rating
|Ticker||Name||Price||Dividend Yield||Payout Ratio||Score|
|ETE||Energy Transfer Equity LP||43.1497||5.81||0||64|
|CNQ||Canadian Natural Resources Ltd||33.98||1.23||14.98||63|
|PM||Philip Morris International Inc||85.78||3.6||57.82||58|
|HSE||Husky Energy Inc||26.06||4.59||50.09||53|
|WMT||Wal-Mart Stores Inc||61.1575||2.6||32.04||44|
|CNR||Canadian National Railway Co||79.292||1.89||23.81||44|
|NA||National Bank of Canada||79.751||3.75||38.36||43|
|EPD||Enterprise Products Partners LP||50.962||4.86||98.09||40|
|BNS||Bank of Nova Scotia||55.291||3.98||44.36||39|
|PG||Procter & Gamble Co/The||67.7438||3.1||47.77||39|
|RY||Royal Bank of Canada||58.34||3.9||46.61||31|
|CLC||CML HealthCare Inc||10.66||7.11||101.23||30|
|BIN||Progressive Waste Solutions Ltd||21.29||2.64||50||18|
What do you think? Do you agree with this ranking? Do you think it could be useful when you build your portfolio?