If you've been reading the My Mad Method [MyMM] series of articles I've been writing here on Seeking Alpha, then you know that MyMM is my way of ranking (currently) 17 metrics in order to evaluate stocks that are on my watchlist, in my portfolio, or in a combination "superlist" of both the watchlist and portfolio. I use MyMM to help me determine what to buy next, as well as what to hold or sell.
If you've been reading the Comments of pretty much any article from the Dividends & Income section of Seeking Alpha, you've probably run across a user with the nickname "chowder", a crusty-but-lovable former Marine who is loaded with investing wisdom and isn't afraid to speak his mind. chowder lists his own portfolio in his Seeking Alpha Profile, and has made his son's Dividend Growth Investing [DGI]-oriented portfolio public and on the web ("Project $3 Million"); he updates this online portfolio monthly. If you want to learn about practical, implementable ideas for DGI, then I strongly suggest you read chowder's comments on the many articles he posts to almost daily.
My primary goal for my portfolio is similar to chowder's, which is:
"[To] share in the profits [of the companies that I'm investing in]. Profits to me, come in the form of dividends. I'm looking for income replacement later in life without having to liquidate positions. So for now, my primary objective is to build a reliable, predictable and increasing stream of income."
That sums up DGI pretty well, at least in terms of how I view it. There are as many variations on this theme, and means of implementing it, as there are DGI investors, but the above quote nails the essence of this style of investing.
The Chowder Dividend Rule
One of chowder's choicer pearls of investing wisdom is something that I refer to as the "Chowder Dividend Rule" [CDR], a key metric that chowder uses as part of his buy-and-monitor DGI strategy to help him determine whether a stock is worthy of acquisition or, more importantly, has fallen from Dividend Growth grace and needs to either be closely monitored, or even expunged from his portfolio.
Here is the definition of the Chowder Dividend Rule in chowder's own words:
"I look for companies who provide a 12% total between the yield and the 5 year compounded annual growth rate [CAGR]. For example, if a company has a 3% yield, the 5 year CAGR must be 9%. If the yield is 4%, the 5 year CAGR must be 8%. When the total number gets below an 8% total, it's time to do some soul searching and determine if it's a keeper or if you're better off moving on."
The Chowder Dividend Rule is really quite simple to implement and follow, and I've included it in my copy of the MyMM spreadsheet to help me keep an eye on the stocks in my IRA's portfolio, as well as aiding in making purchasing decisions of new positions. To calculate the CDR, simply add a stock's Yield to its 5 Year Dividend Compound Annual Growth Rate, both of which are percentages, which helps keep things simple.
- If the result is 12% or higher, then that stock is deemed "healthy" in terms of its DGI status, and all is well.
- If the result is less than 12% but greater-than-or-equal-to 8%, then that position warrants some closer monitoring to try to determine what has caused its CDR to fall below 12%.
- If the result is below 8%, then the stock "requires a new period of due diligence and based on those findings, a decision is made". It's probably time to jettison that stock if it's already in your portfolio (or avoid it altogether if you were considering adding it to your portfolio), and use the proceeds to find another suitable stock (or two) to take its place.
chowder goes on to further explain his view of the CDR:
"As far as yield goes, I think the minimum yield should be 2.5% or better. That's what I use."
(Personally, I like to set the bar a little higher, at 3.0%, but your tastes may vary.)
"The reason I use 12% on the total number is because my goal is to achieve an 8% compounded annual rate of growth. I use 12% as a safety margin because as price goes higher, I'm not concerned about the capital gains, I'm concerned about the dividend growth. So, I don't have to sell as long as the position is still providing me with 8% CAGR total or better, which keeps me on schedule. If someone else has a different number in mind as to their compounded annual growth rate, they will need to adjust this metric."
The beauty of the CDR is that while you are actively monitoring the stocks in your portfolio, you should be able to see its CDR slip below 12% in plenty of time to take action before it gets close enough to 8% to warrant being sold. This should, hopefully, allow you to avoid the possible bloodbath that could ensue should the lemmings start fleeing the stock and its sinking yield and, consequently, dragging down its price. If you can get out ahead of the crowd, you'll be in a better position to redeploy those assets into something that's healthier and/or has better prospects in terms of its dividends.
Some CDR Examples From The Utilities Sector
The following are some examples that chowder provided to me from the utilities sector, where he relaxes the 12% threshold down to an 8% CDR initially, given the nature of dividends from such companies. However, chowder wants to see a minimum yield of 4%, so it's going to take a 4% yield and a 5 year CAGR of 4% or better for any given utility company to qualify.
For example, Consolidated Edison, Inc. (ED) has a 4.00% yield, but only has a 5 year CAGR of 0.85%. That's way too low to qualify under chowder's rules, even for a utility.
Dominion Resources, Inc. (D) also has a 4.00% yield, but still has a 5 year CAGR of 8.05% for a CDR result of 12.05%. It clearly qualifies as a prospect with these numbers.
Southern Company (SO) has a 4.30% yield and a 5 year CAGR of 4.03% for a CDR of 8.33%, and therefore qualifies as a prospect under chowder's modified rules for utilities.
"Once they qualify for the Chowder Dividend Rule, it's simply a matter of waiting on your price point to enter."
Implementing CDR in MyMM
Implementing the CDR in the MyMM spreadsheet was very simple for me, as I already track "Yield" and "5 Year Dividend Growth [CAGR]" in my personal MyMM spreadsheet. (These two metrics are also present in the "blank" MyMM spreadsheet, which I make available to anyone who requests it; all you need to do is send me a Private Message here on Seeking Alpha with your email address, and I will ship it out to you, no charge.)
To add the Chowder Dividend Rule to the MyMM spreadsheet, I inserted a column between the existing columns "Dividend Growth Rank" and "TTM Cash Margin", then put the following formula in the first stock row's cell in that column, and copied it down the column for the rest of the rows of data that I had:
Where "J" is the column containing Yield, "N" is the column containing the 5 Year Dividend CAGR, and "n" is the number of the current row.
Then, being me, I added Microsoft (MSFT) Excel's Conditional Formatting to all of the cells with this formula in this new column, so that when the value in the cell is greater-than-or-equal-to 12%, the cell turns green (meaning "OK"), when it is greater-than-or-equal-to 8%, the cell turns yellow ("Warning"), and when it is less than 8%, the cell turns red ("Danger!").
(If you implement the Conditional Formatting rules in this order, then the formatting will behave properly; otherwise, if the condition for greater-than-or-equal-to 8% comes before the greater-than-or-equal-to 12% condition, your "OK" stocks will register a "Warning", which is incorrect.)
The results end up looking like this (a sample taken from my combined, weighted superlist):
As you can see, having the Conditional Formatting really helps spot the Warning and Danger situations in terms of the Chowder Dividend Rule.
Of course, you don't have to use Excel's Conditional Formatting in your spreadsheet, but it makes it so much easier to see how things are doing in terms of the CDR, as well as the MyMM Rank. (Plus, it's fun!)
I don't use the Chowder Dividend Rule as one of the metrics to evaluate the stocks on my watchlist, portfolio list or superlist, as its components, Yield and 5 Year Dividend CAGR are already ranked, and to rank the CDR would be redundant and unnecessary. In fact, to rank the CDR and make that the 18th metric (in my case) would be a kind of "double counting" of its component metrics (albeit, half for each). Instead, I just display the number with the Conditional Formatting, and use that as a visual clue as to how things are going for everyone in terms of their CDR.
So, the evolution of the My Mad Method spreadsheet continues. With this simple change I now can spot stocks that are slipping in terms of the Chowder Dividend Rule, or have reached the point where they're in trouble in terms of their dividend prowess.
If you already have the MyMM spreadsheet, and you still have the "Yield" and "5 Year Div Growth" columns in it, then all you need to do is follow the instructions above to include the Chowder Dividend Rule to your copy. I will update the "blank" copy to also include the CDR, and if you would like a copy of it, just let me know via a Seeking Alpha Message.
Many thanks to chowder for all of the wisdom he has dispensed, for providing me with the specifics of the CDR, and for sharing his portfolio and that of his son for all of us to monitor, to see for ourselves whether DGI really can work in terms of generating sufficient income from dividends to meet our retirement needs.
Disclosure: I am long MSFT.
Additional disclosure: Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.