High Yield Dividend Champion Portfolio - September Update

by: Scott's Investments

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

There is turnover in one position this month. Universal (NYSE:UVV) has been a long-term holding but was sold for a capital gain of 12.42% and an original purchase date of 4/5/2012. The proceeds were used to purchase Mercury Insurance (NYSE:MCY), which currently yields 4.85%.

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 93% including dividends. 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 US 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.

I have also created a second portfolio using similar metrics as the High Yield Dividend Champion portfolio. The primary difference is it only requires 10 years of dividend increases and it also hedges the portfolio during unfavorable market conditions. Hedging requires margin, but the portfolio can also be implemented without the hedge. The portfolio is available on Portfolio123 and backtested results were posted in the June update.

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.

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

Name Symbol Yield
Chevron Corp. CVX 3.31
Tompkins Financial Corp. TMP 3.49
Old Republic International ORI 4.76
AT&T Inc. T 5.26
Eagle Financial Services EFSI 3.21
ExxonMobil Corp. XOM 2.77
McDonald’s Corp. MCD 3.46
Community Trust Banc. CTBI 3.38
Mercury General Corp. MCY 4.80
First Financial Corp. THFF 3.03
Wal-Mart Stores Inc. WMT 2.54
Helmerich & Payne Inc. HP 2.62
Consolidated Edison ED 4.35
Weyco Group Inc. WEYS 2.82
Altria Group Inc. MO 4.83

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

The current portfolio is below:

Position Initial Purchase Date Percentage Gain/Loss Excluding Dividends Current Allocation
CVX 12/6/2012 17.90% 9.07%
MCD 1/3/2014 -3.59% 8.02%
ORI 4/4/2014 -7.83% 8.83%
MCY 9/5/2014 0.00% 9.27%
TMP 8/6/2014 2.56% 10.09%
CTBI 5/5/2014 -3.01% 12.47%
XOM 4/5/2013 11.52% 10.03%
MO 3/5/2013 25.26% 10.05%
T 3/6/2014 8.69% 12.02%
THFF 7/7/2014 1.78% 9.82%

Disclosure: None

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.