Dividend Growth Investors: You Got To Do The Work

Includes: AFL, TGH
by: Bob Wells

If you are retired like me, you may have made the choice to embrace the Dividend Growth Investing (DGI) approach to provide a retirement income stream. Many of you may be just beginning to convert old mutual funds and ETFs to a portfolio of solid performing Dividend Growth stocks.

You have done your homework and know the importance of choosing stocks that are fairly valued and have a solid record of not cutting but in fact consistently growing their dividend. You know the difference between a stock with a dividend and a true Dividend Growth stock.

If you are already retired you are probably looking for a portfolio yield of 4% or more and dividend growth at least equal to inflation. You are probably looking to build a portfolio that is diversified across sectors and industries. Many of you probably join me in preferring low beta stocks, helping to ensure a smoother ride during times when the market is turbulent.

I hope that you have joined me in drafting a business plan for your portfolio including set guidelines for both buying and selling stocks. Ironically when I wrote an article reviewing mine and the changes I had made, it was one of my least read articles. Well I'm giving you a second chance folks with this link.

I can't stress enough how important I think having a personal plan and actually following it is to the probability of your success. It is such a plan that helps take emotion out of your investment decisions and helps you sleep well at night.. no small feat for some of us.

Recently a number of my readers suggested that I do an article where I walk folks step by step though the process I use when evaluating a stock.

Let me start by saying that when I purchase a stock I expect it may be part of my portfolio for a decade or more. Second, I am very risk adverse. I wish to maintain a portfolio with an overall beta of less than 0.7%. Third, more than 90% of my portfolio is made up of stocks included on the list of Dividend Champions, Contenders and Challengers (CCCs) maintained and updated monthly by contributor David Fish. A link to the current addition is here.

The stocks on these lists and the important information about each which is provided serves as one of the two tools I'll use for today's walk-through. The second tool I'll demonstrate is the Morningstar website where I run the performance histories for the stocks I am considering as well as reviewing Morningstar's assessment of a stock's value.

To best benefit from the instruction I'm about to provide, I suggest you copy and print this article and follow along step by step. First click on the above link. Next under U.S. Dividend Champions, click on excel spreadsheet. After you have downloaded the spreadsheet you will notice a gray bar at the bottom containing separate tabs for Dividend Champions, Contenders, Challengers and one marked All CCC. Click on All CCC. You have now downloaded information on the 469 stocks having the distinction of a minimum of 5 years of sustained dividend growth.

Many may wish to edit this list by deleting those companies that fail to match certain criteria. For example: I chose not to invest in U.S. banks, so each bank is deleted. I required adequate current yield for income so I deleted those with yields of less than 2.5%. Even those unfamiliar with Excel can easily delete those stocks that don't match their criteria resulting in a more useful and manageable list.

Next scroll down to a stock you are interested in reviewing. For illustration purposes I have chosen AFLAC (NYSE:AFL), A company on my current watch list available here.

As we move to the right we notice a yield of 2.64, a payout ratio of 23.18, Est. 5-year growth of 8.8%, a 5yr. Dividend Growth Rate (DGR) of 10.9 and a beta of 1.84.

I suggest that you take the time to fully explore all the information available through this powerful resource.

Next let's scroll down to #469 and examine another stock on my watch list, Textainer Group Holding (NYSE:TGH). As we move to the right we notice a yield of 4.25, EPS Payout of 44.11, Est. 5 yr. Growth of 8.1, 5yr. DGR of 52.1, 1 yr. DGR of 27.3 and a beta of 1.66.

We move to Step Two by going first to the Morningstar website. Next, we place the ticker for AFAC - AFL in the "Quote" box at the top of the page. Next we click on "Quote".

Under stock name, we click on the "performance" tab located on the second bar. Under last price we click on expanded view. We now have a year by year history for this stock from 2003 to 2012. We note that the stock has had two down years during that period, 2008 and 2011. As we scroll down the page we find that AFL had a ten year total return of 6.55% vs. 7.93% for the S&P 500 Index.

Next, since we want to compare this stock performance with that of TGH, we scroll up and click on compare. Next under enter tickers add TGH and click on add. We notice TGH has a shorter history only going back to 2008. We see that its loss of 20.92 in 2008 was less than AFL and only about half that of the index. 2008 was its only losing year.

As we scroll down we look again at average return, this time 5 year, since TGH is a newer offering. Here we find a 5yr average total return of 34.29 vs. (0.74) for AFL.

In further review, we find much higher yield with TGH, slightly better forward growth for AFL, much stronger 5 year capital gain for TGH, much stronger projected Dividend Growth for TGH as well as slightly lower beta.

For my needs I personally prefer TGH to AFL were I to consider a purchase today.

In deciding between any two stocks, each of us will make our final decision based on any number of personal investing criteria, hopefully spelled out in your portfolio business plan. What I have tried to do here, is to walk you through the process I currently use.

I am continuing to run ten year histories for each of the 150 stocks on my personalized list of Dividend Champions, Contenders and Challengers. I make further cuts as I find stocks whose 10 year performance histories do not match the criteria spelled out in my business plan.

Next time around I will be presenting the Final Quarter review for my personal portfolio including a complete listing of my holdings. I hope to see you again soon and continued good luck this earnings season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.