While the outcome of tonight's election will no doubt have implications for retirees, we encourage investors to stay focused on their dividend investment plan. In reality, regardless of who wins tonight, the U.S. economy will continue to face significant headwinds and its more important than ever to stick to your plan.
High debt levels, stagnant employment, and the slow housing recovery will still be a reality tomorrow when we all wake up. Interest rates will remain near zero for the foreseeable future and income investors will have to continue to scramble for safe yield.
In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. As volatility increases (especially downside volatility), investors may want to add some low beta stocks to their holdings to help dampen portfolio volatility. In general, companies with low betas will tend to be less volatile than the general market. That said, any pullback in the market should be an opportunity to add to your low-beta dividend stock positions.
We created a rating system that ranks over 700 U.S. dividend stocks on a monthly basis and Apple currently rates very highly. Our composite ratings are derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories: Risk-Reward Profile, Financial Stability, Dividend Track Record, Dividend Sustainability, and Relative Strength.
Most online brokers offer their clients stock screening software for free. Investors can utilize this software to determine which stocks are the most desirable for their portfolio based on criteria that fits their investment plan. Our overall rating and each sub-category rating range from 1 (lowest) to 99 (highest). When choosing investments for our "model" DIY Dividend Portfolio, we tend to target stocks with an overall rating of at least 80.
Based on our ratings, we recommend that retirees consider the following stocks for their portfolio (all of which have an overall Parsimony rating of at least 90 and a 5-year beta under 0.50).
This select group of top-rated stocks have an average dividend yield of 4.3% and average beta of 0.33. When analyzing the sub-ratings for each stock, you can see that most top-rated stocks generally have very strong scores (90+) in several of the sub-rating categories as well (see table below).
Abbott Laboratories (ABT) has very high ratings for Dividend History (93) and Financial Stability (91). Rightly so, the company has grown revenues and earnings at a compound annual rate of 10.4% and 19.8%, respectively over the past 5 years. In addition, Abbott has paid a stable dividend for well over 25 years now.
Altria Group (MO) has a very high rating for Risk Reward Profile (97). The company has an above-average current dividend yield (5.5%), which has helped the company deliver an average annual total return of 15.4% to shareholders over the past 5 years.
General Mills (GIS) has the lowest beta of the group (0.16) and high ratings for Risk Reward Profile (93) and Dividend History (90). The company has increased its dividend at a compound annual rate of 11.0% over the past 5 years, which has helped deliver an average annual total return of 10.1% to shareholders over that same period.
Kinder Morgan Energy Partners (KMP) has the highest dividend yield of the group (6.1%) as well as the highest Risk Reward Profile rating (98). KMP shareholders have enjoyed a 5-year total return of 122%, with a maximum drawdown of only 28% over that period. To put that in perspective, the average maximum drawdown over the past 5 years for all the stocks in our dividend universe is over 61% (more than double KMP's drawdown). Now you can see why KMP rates so highly in this category.
McDonald's Corp (MCD) has been beaten down lately based on weaker than expected guidance. However, the stock carries our highest possible rating for Dividend Track Record (99) and we believe that it is still a great long-term stock for a DIY Dividend Portfolio. MCD has produced a respectable 5-year total return of 73%, with a very conservative maximum drawdown of 21%. Even more impressive is the fact that the company has increased its dividend at a compound annual rate of 28% over the past 10 years! MCD is probably one of the best dividend growth stocks of all time.
We created our ranking system to help us find the best dividend stocks. If you rank all of the stocks in a universe against their peers on a consistent basis, it becomes clear which companies are the strongest and which offer the best investment opportunities going forward. The ranking system also helps us monitor the health of the stocks going forward.
Whether or not you use a rating system like the one described above to find great dividend stocks, the key takeaway here is to formulate a consistent process for picking your stocks. There are some great tools out on the web so you should never be "throwing darts" when building your DIY Dividend Portfolio.
Note to readers: We will detail how to pick low risk entry points for these top-rated stocks using our "Buy Zones" in Part 2 of this series, so please make sure to "follow" us.