May High Yield Dividend Champion Portfolio

by: Scott's Investments

The High Yield Dividend Champion stock portfolio has been updated for May. The portfolio is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott's Investments.

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 rank high yield/low payout stocks. The screening process for this portfolio 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.

To date the portfolio is up over 91%. I mentioned in the 2013 year in review that valuation of high yield stocks was a concern. In January's update I noted that;

I have lowered my expectations for future returns of U.S. equities and high yield stocks.

I added a valuation filter to the portfolio starting in 2014 in an attempt to mitigate concerns over valuation. We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively "high" yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and price-earnings (P/E) ratio. Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system 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 15 (to limit turnover) and are replaced with the next highest rated stock.

There is turnover in one position this month. Cincinnati Financial (NASDAQ:CINF) was sold for a capital gain of 4%+ and an original purchase date of 2/5/14. Community Trust Bancorp (NASDAQ:CTBI) replaces CINF in the portfolio. CTBI is currently ranked eighth using our ranking methodology.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are April month-end):

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.19 36.10 11.15 11.33
AT&T Inc. T 5.15 53.64 2.33 10.41
Universal Corp. UVV 3.74 39.08 2.08 10.45
Tompkins Financial Corp. TMP 3.39 46.11 5.03 13.59
Eagle Financial Services OTCQX:EFSI 3.30 38.58 3.27 11.68
Old Republic International ORI 4.41 47.10 1.43 10.68
McDonald's Corp. MCD 3.20 58.80 11.35 18.40
Community Trust Banc. CTBI 3.47 46.21 1.49 13.31
ExxonMobil Corp. XOM 2.70 37.25 12.24 13.82
Weyco Group Inc. WEYS 2.87 44.44 4.13 15.49
Altria Group Inc. MO 4.79 84.96 8.23 17.75
American States Water AWR 2.67 50.63 13.48 18.98
PepsiCo Inc. PEP 3.05 59.28 6.39 19.43
1st Source Corp. SRCE 2.44 31.58 3.69 12.93
Target Corp. TGT 2.79 55.84 23.44 20.05

As previously stated EFSI is not purchased due to its low liquidity.

The current re-balanced portfolio is below:

Position Initial Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 12/6/2012 16.01%
MCD 1/3/2014 4.76%
ORI 4/4/2014 2.96%
UVV 4/5/2012 17.67%
TGT 2/5/2014 8.72%
CTBI 5/5/2014 0.00%
XOM 4/5/2013 15.62%
MO 3/5/2013 15.16%
T 3/6/2014 10.58%
TMP 1/3/2014 -8.79%

Disclosures: None

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.