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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.

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 first rank them based on yield. The highest 1/3 yielding stocks are kept and the rest are eliminated. With the remaining high yielding stocks we eliminate half with the highest payout ratio. The remaining stocks are then 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).

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 July 4th there is one change to the portfolio, 442 shares of UGI Corp (NYSE:UGI) were sold at a gain of 3.72% and the proceeds used to purchase Universal Health Realty Trust (NYSE:UHT). UHT yields close to 6% with a payout ratio under 40%. It was recently upgraded to "Champion" status from "Contender" status, which is reserved for companies with dividend increases for the past 10-24 years. UHT operates as a real estate investment trust (REIT) in the United States. The company invests in healthcare and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings.

Using Born To Sell we can explore potential covered call opportunities on stocks in the portfolio. At the time of writing last month I proposed rolling the covered calls on Chevron (NYSE:CVX) by closing the existing position (the $105 strike at $.15 or the $110 at $.05) and selling a July 105 call for $.93 or a July 100 call for $2.98. CVX rallied in June, so the $100 and $105 calls are now in the money. A covered call could be rolled by closing the July 105 call for $3.20 and selling an August 110 call for $1.26.

The equity curve of the portfolio is plotted below and since inception it is up over 30%. All discussions of returns are strictly hypothetical and exclude commissions and taxes.

Click to enlarge:

The top 17 rated stocks for the purposes of this portfolio's criteria are listed below:


Company Symbol Yield Payout %Ratio Yield/Payout (E/P)
Universal Health Realty Trust UHT 5.92 39.3 15.06%
Chevron Corp. CVX 3.41 26.45 12.89%
Walgreen Company WAG 3.72 37.93 9.81%
Mercury General Corp. MCY 5.86 64.89 9.03%
Tompkins Financial Corp. TMP 3.82 46.6 8.20%
Community Trust Banc. CTBI 3.7 46.1 8.03%
Eagle Financial Services OTCQB:EFSI 3.58 48.98 7.31%
Emerson Electric EMR 3.43 51.12 6.71%
Sonoco Products Co. SON 3.98 60.3 6.60%
Sysco Corp. SYY 3.62 55.38 6.54%
Universal Corp. UVV 4.23 65.77 6.43%
Nucor Corp. NUE 3.85 60.83 6.33%
UGI Corp. UGI 3.67 64.29 5.71%
Clorox Company CLX 3.53 63.37 5.57%
Consolidated Edison ED 3.89 70.14 5.55%
Johnson & Johnson JNJ 3.61 67.03 5.39%
Procter & Gamble Co. PG 3.67 70.03 5.24%
Kimberly-Clark Corp. KMB 3.53 68.68

5.14%

Disclosure: None

Source: High Yield Dividend Champion Portfolio: July Update