High Yield Dividend Champion Portfolio: August Update

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 (see the right hand column of Scott's Investments homepage 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 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 August 3rd there is one change to the portfolio, 364 shares of Nucor (NYSE:NUE) were sold at a gain of 7.26% (excluding dividends) and the proceeds used to purchase Diebold (NYSE:DBD). DBD currently yields 3.54% with a payout ratio under 39%. The stock declined last week due to a poor earnings report and lowered guidance.

Chart courtesy of Finviz:
Click to enlarge

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 a covered call by closing the July 105 call for $3.20 and selling an August 110 call for $1.26. To close out the August 110 call on CVX as of Friday would cost $2.08, and the position could be rolled to the September 115 strike for a credit of $.99. Given that CVX has been steadily moving up, rolling the covered calls in the last months have results in net losses but would allow you to continue holding the shares assuming they were not already called away. This covered call strategy is for example purposes only, but can serve as an additional income generating technique for those investors comfortable with options.

The equity curve of the portfolio is plotted below and since inception it is up over 31%. All discussions of returns are strictly hypothetical and exclude commissions and taxes.

The top 17 rated stocks for the purposes of this portfolio’s criteria are listed below:
Company Symbol Yield Payout%Ratio E/P
Universal Health Realty Trust UHT 5.65 39.94 0.1415
Chevron Corp. CVX 3.29 26.45 0.1242
Mercury General Corp. MCY 6.74 64.89 0.1038
Diebold Inc. DBD 3.52 38.91 0.0906
Community Trust Banc. CTBI 3.71 43.45 0.0854
Eagle Financial Services OTCQX:EFSI 3.27 43.11 0.0759
Tompkins Financial Corp. TMP 3.67 48.65 0.0754
Mine Safety Appliances MSA 3.26 46.86 0.0696
Sysco Corp. SYY 3.67 55.38 0.0663
Emerson Electric EMR 3.35 51.12 0.0655
Universal Corp. UVV 4.30 65.77 0.0654
Sonoco Products Co. SON 3.96 60.91 0.0650
Clorox Company CLX 3.52 63.37 0.0556
UGI Corp. UGI 3.52 64.29 0.0548
Consolidated Edison ED 3.75 70.14 0.0535
Procter & Gamble Co. PG 3.48 70.03 0.0497
Kimberly-Clark Corp. KMB 3.41 68.68 0.0496
Click to enlarge

A note regarding Eagle Financial Services--the stock is a Dividend Champion but trades over the counter and has very low volume. Any entry/exits in this stock should be treated with caution and limit orders are highly recommended.

Disclosure: No positions