This is more of a philosophical question to highlight an important aspect of our dividend stock rating system that investors should consider when analyzing stocks for their own DIY Dividend Portfolio. In reality, you would probably consider owning both, but lets take a look at the details provided below.
We use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 700 U.S. dividend stocks on a weekly basis.
Our composite rating is derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories:
- Risk-Reward Profile (e.g., current yield, Calmar ratio)
- Financial Stability (e.g., sales and EPS growth, ROE, leverage)
- Dividend History (e.g., historical dividend stability and growth)
- Future Dividend Potential (e.g., payout ratio, EPS estimates)
- Relative Strength (e.g., 12-month total return and trends)
It should be noted that we also believe that patience is a virtue. Just because a stock has a high Parsimony composite rating, it doesn't necessarily mean that you should run out and purchase it that day. We scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results.
The tables below highlight our ratings (and sub-ratings) for Annaly and Coca-Cola. Note that our ratings ranges from 0 (lowest) to 99 (highest).
Clearly, Coke has by far the superior overall Parsimony rating and when you look at the sub-rating analysis you can see why. Other than Dividend Potential, Coke has very respectable ratings across the board. On the other hand, Annaly really on scores well in one category (Risk-Reward). That said, we believe that Risk-Reward is the most important sub-rating that we track (as such, it carries the highest weighting in our overall Parsimony rating of any sub-category).
There are five main data points that we track for Risk-Reward: (1) current dividend yield; (2) 5-year total return; (3) Calmar ratio; (4) beta; and (5) correlation to S&P 500.
As shown in the table below, the combination of low beta, high dividend yield and high Calmar ratio (annualized total return / maximum drawdown) has produced superior risk-adjusted returns for Annaly investors over the past 5 years (hence the higher Risk-Reward rating). Annaly's 5yr annualized total return is 50% higher than Coke's, yet both stocks were subject to the same downside price risk (as measured by the maximum drawdown).
Obviously, both stocks deserve a look for your DIY Dividend Portfolio. We all know the risks associated with Annaly (and other mREITs), but investors are clearly getting well compensated for that risk (as indicated by the extremely high Risk-Reward sub-rating). This is part of the reason why we developed the Parsimony rating system. Even though Coke is the clear winner based on our overall Parsimony rating, Annaly has some really important strengths that investors should not overlook. With better risk-adjusted returns, lower relative beta, and lower relative correlation, Annaly could also provide some nice diversification to your DIY Dividend Portfolio.