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 on Scott's Investments (see the right-hand column for a link to the spreadsheet).
Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I 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."
The High Yield Dividend Champion 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 September 6, there are two changes to the portfolio,123 shares of Chevron (CVX) were sold at a gain of 8.98% (excluding dividends) and 306 shares of Mercury General (MCY) at a loss of 11.58% (excluding dividends). The proceeds used to purchase Vectren (VVC) and Questar (STR). VVC currently yields 3.54% while STR yields 3.38%. Both stocks have pulled back in recent weeks despite overall equity market strength.
Chart courtesy of Finviz:
Click to enlarge
The equity curve of the portfolio is plotted below and since inception it is up over 34%, including dividends. All discussions of returns are strictly hypothetical and exclude commissions and taxes.
The top 18 rated stocks based on this portfolio's criteria are listed below:
|Universal Health Realty Trust||UHT||5.70||39.94||0.1427|
|Community Trust Banc.||CTBI||3.66||43.45||0.0843|
|Eagle Financial Services||EFSI.OB||3.59||43.11||0.0833|
|Tompkins Financial Corp.||TMP||3.71||48.32||0.0767|
|Sonoco Products Co.||SON||3.92||60.91||0.0644|
|American States Water||AWR||3.26||56.80||0.0574|
|California Water Service||CWT||3.44||71.59||0.0481|
|Procter & Gamble Co.||PG||3.35||72.28||0.0463|
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: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.