Warren Buffett started his life as a natural-born entrepreneur. As a child he sold chewing gum, Coca-Cola and magazines door-to-door. In high school he earned money as a paper boy and auto detailer, then invested these proceeds in his father's business and a farm. Both of these investments netted him a sum total $90,000 in today's money. After a stellar education he moved quickly from investment salesman, to securities analyst, to general partner of Buffett Partnership, Ltd, now present-day Berkshire Hathaway (BRK.A). He is now the world's third richest billioinaire.
If you could turn his life into a stock trading game, how would you play it? Would you invest in him after he made Berkshire Hathaway a household name? Or would you invest in him as a paper boy in high school, where he shows great promise but is still unknown?
Every Great Company and Stock Starts Somewhere…
The companies and stocks we invest in also have to start somewhere. Great companies are innovating, developing, growing and earning, even if they are not currently being noticed by the media and stock analysts.
Waiting until they show up onto the pundits' radar will certainly net you a safer investment. However, for the more adventurous - and those who care about total return - it may be worthwhile to learn how to find these hidden gems before they get famous. (I am an income investor, and as such this article will focus on dividend growth stocks, as opposed to pure growth investments.)
The Ultimate List of the "Rich and Famous": David Fish's CCC List
It does not take much perusing on the Dividends & Income section of Seeking Alpha to encounter the importance of David Fish and his list of Champions, Contenders, and Challengers (CCC) for dividend growth investors. This list, located at dripinvesting.org, is the "go to" list detailing established dividend growth companies. The threshold of inclusion at the lowest level of dividend growth, the "Challengers" list, is 5 years of consistent dividend growth.
I contacted David Fish for this article and asked him - what is your method for discovering candidates to add to your CCC list?
Secrets of David Fish
It is obvious to anyone who has accessed the CCC list that it a monumental undertaking. David must pour an incredible amount of work into compiling and maintaining the list, using a compendium of sources including and above what he disclosed to me.
I fully recognize asking David Fish, "how do you do this?" may be the equivalent of calling Coca-Cola and asking for the secret recipe! Even so, David did oblige me and divulged a few of his secrets:
Secret #1 - Monitor News Outlets
Secret #2 - Dividend Websites
The website "The Dynamic Dividend" provides a list of what they call "Dividend Dynamos." From my own perusal they provide a wealth of information in the form of lists and articles.
He gave me two great suggestions, yet I am still curious. What are other ways of discovering dividend stocks "before they are stars," in their infancy of dividend growth, before they make the CCC list?
Secrets of Five Plus Investor
When you read Secret #3, you are going to kick yourself. I certainly did. I spent years researching for my own lists when little did I know that a readily accessible list was, like, right there.
Secret #3 - CCC List "Notes" Section
Most of us access David Fish's CCC list and only click the first three tabs from the left-hand side, which are the Champions, Challengers and Contenders tabs. How many of you realize there are four other tabs of information? Did you know that in the Notes Section (far right tab), Appendix B there is a list of "companies that have increased their dividends for four years and may join the Challengers listing in the next 12 months"?
As of today, this is what this list looks like:
|ASML Holding N.V.||ASML|
|Beacon Federal Bancorp Inc.||BFED|
|BGC Partners Inc.||BGCP|
|Cablevision Systems Corp.||CVC|
|Cenovus Energy Inc.||CVE|
|ConAgra Foods Inc.||CAG|
|Duff & Phelps Corp.||DUF|
|Frisch's Restaurants Inc.||FRS|
|MarketAxess Holdings Inc.||MKTX|
|Mead Johnson Nutrition Co.||MJN|
|Molson Coors Brewing Co. B||TAP|
|Navios Maritime Partners LP||NMM|
|Northfield Bancorp Inc.||NFBK|
|OPNET Technologies Inc.||OPNT|
|Oritani Financial Corp.||ORIT|
|PetMed Express Inc.||PETS|
|Philip Morris International||PM|
|Principal Financial Group Inc.||PFG|
|R.G. Barry Corp.||DFZ|
|Reliance Steel & Aluminum Co.||RS|
|Scripps Networks Interactive Inc.||SNI|
|Silvercorp Metals Inc.||SVM|
|Stewart Enterprises Inc.||STEI|
|Sturm Ruger & Company||RGR|
|TESSCO Technologies Inc.||TESS|
|United Guardian Inc.||UG|
|Western Union Company||WU|
This list is the ultimate "before they were stars" compilation. Finding this list in December helped me to locate two stocks I am now invested in: BGC Partners, Inc. (BGCP) and Navios Maritime Partners, LP (NMM), both with generous yields that exceed my 5% threshold.
Secret #4 - Morningstar Stock Screener
Morningstar provides one of the few screeners out there that allow you to screen for dividend growth. Better yet, they allow you to screen for less than 5 years of growth.
You need not pay a fee to access Morningstar. Most public libraries have online business databases (most include Morningstar) which you can access with your library card number from home. You pay nothing for your library card, and nothing to access the online databases.
If you are going to screen for dividend candidates, it is imperative to know what other factors to screen for. You always want to look for a growing company, if you are looking for a company to grow its dividends. Some growth metrics to consider for your screen:
- Revenue Growth %
- Net Income Growth %
- EPS Growth %
- EPS Estimates for Next Year
- EPS Estimates for Next 5 Years
There are numerous other considerations for a screen, including valuation (P/E, P/S, PC and P/FCF), debt, payout ratio, analysts ratings, just to name a few.
For the fun of it, I conducted such a screen for this article. The screen criteria were set as follows:
- Dividend Growth % - Year 2 / Year 3 and Year 3 / Year 4 >= 3% per annum (note: this is 2 to 3 years of dividend growth)
- Forward P/E <=15 or less
- EPS Growth, Next 5 Years >= Sector Average
- Dividend Yield >= 3%
This screen renders a selection of 27 stocks. Unfortunately, we have not yet arrived at our destination. This screen rendered only a baseline list that requires more research, with our first task to eliminate stocks already on the CCC List. We then need to look at dividend history. There are three great resources for this:
- David Fish's "Changes" section lists stocks deleted for lack of dividend increases;
- DailyFinance.com has a "Dividends" section for every stock quote, listing each dividend amount paid and dividend announcements; and
- Your brokerage account may have a "dividends" tab on your charting options (Scottrade does).
After eliminating all the choices already on the CCC list, and using these resources, we end up with a singular "before they were stars" candidate:
|Cablevisions Systems Corp.||CVC|
CVC maintained a steady 10 cent dividend until June 2010, when it increased its dividend 30% to 13 cents per share. It raised its dividend again in 2011 by almost 20%. It is currently overdue for an increase, but should that increase be announced this year, it could be on its way to David's Challenger's list.
Secret #5 - Aging Stars That Turn their Careers Around
We all know about John Travolta. He was the star of the 1970s sitcom "Welcome Back, Kotter" who shot to cultural icon status with movies "Saturday Night Fever" and "Urban Cowboy". Then came a string of flops, and John Travolta was relegated to B- and C-List status. Years later, he made "Pulp Fiction," and yet again, his star was reborn.
Likewise, some dividend growth machines can lose their star status. Dividend cuts or eliminations are considered just cause for the tried-and-true dividend growth investor to sell his position.
Does that mean it is advisable in all cases to sell forever and never consider the stock again? I don't think so.
General Electric (GE) is a good case-in-point. Along with Bank of America (BAC), they are the poster children for great companies who cut their dividends during the financial crisis. This happened July 2009. However, since October 2010, it has been growing back its dividend at a rapid pace, raising it two straight quarters in a row, then every third quarter since January 2011. Most analysts are predicting yet another increase for the next quarter, and management is keen to regain its status as a dividend stalwart.
Secret #6 - Seeking Alpha Articles
Secret #6 is a bit like the picture of a person looking in the mirror, where the mirror reflects that person looking in a mirror, which that mirror reflects that person looking in the mirror…you get the point.
Still, there are certain contributors who seem to have as their niche, finding the next great investment in dividends, and I follow and/or recommend these contributors:
Secret #7 - The Serendipitous Lucky Screen
Sometimes you play around and you find by sheer coincidence your own personal "next big thing." What's my 5-step plan for making this happen? Well…I don't have one. It's serendipity: you can't make it happen. I can only give one example of how serendipity has worked for me:
|Tal International Group||TAL|
I was researching Textainer Group (TGH) when I got curious. Is there a similar stock with a higher yield? I plugged into finviz.com, an excellent charting and screening website, and found the sector designation was Rental and Leasing Services. I clicked the link for Rental and Leasing Services then set the criteria to dividend yield above 5%. This rendered five candidates: (AYR), (BOX), (ELRC), (FLY) and (TAL).
As I researched these five, TAL stood out. It is experiencing strong insider buying, yet had reached oversold territory. It is also a turnaround story. While cutting its dividend in early 2009, since March 2010 it has been on a rapid track of dividend increases, increasing every quarter or every other quarter. If it maintains its current track, it too will become a Dividend Challenger.
Back To Our Stock Market Game…
While it's fun to think of investing as a game, the reality is our investment portfolios are not in existence for our amusement. They provide much needed income for daily life and retirement. As such, it is best to anchor your portfolio in what is considered the safer side…dividend growth stocks, selected bonds and preferred shares. However, for those of us who like a little more adventure, there's no harm in seeking out higher alpha in the next big "before they were stars" dividend stock, as long as that stock remains a "sidelines" holding until it proves itself.
Who knows? That paper boy you just invested in might turn out to be the next Warren Buffett.