In my Dividend Growth Portfolio – which is a real-time, real-money portfolio that recently passed its 9th anniversary – I reinvest dividends when they accumulate to $1,000 in cash in my account. That happens about four times per year. I don’t drip the dividends.
The next $1,000 threshold will be hit soon, which means that I get to go shopping. I love shopping for dividend growth stocks. Because no new (outside) money ever enters this portfolio, dividend re-investments are the only times that I can shop for new stocks to place into the portfolio.
I have used various methods over the years to select stocks. Sometimes, I buy more of something I already own, while other times, I choose an entirely new stock. I like to find high-quality companies that have a certain minimum yield and that are trading at good valuations when I buy them.
This time around, I thought it would be fun to seek the “best” stock from among those that I have written up as Dividend Growth Stocks of the Month for Daily Trade Alert.
I conduct an analytical investigation for the stocks that I write up. While the exact factors and scoring systems have evolved since I began the series in 2015, two categories that I have always examined are the stock’s dividend resume and its quality as a company.
For example, in my recent report on Lowe’s (LOW), here is what its Dividend Resume looked like.
I color code each factor: red is worst, yellow is average, and dark green is best. I can easily make the color codes into a point system, assigning 1 for red, 2 for orange, 3 for yellow, 4 for green, and 5 for dark green. Doing that with the table above, I would get a total score of 46 for Lowe’s dividend record. Since there are 10 factors, that means the per-factor score is 4.6. Since 5 is the maximum score, 4.6 is very good.
I grade Company Quality similarly. Here is Lowe’s quality scoring.
The total score is 18, or an average of 4.5 per factor. Again, that’s a very good score.
I have carried those scores into the table below. The table lists the 20 stocks that I have analyzed since the beginning of 2016, showing their per-factor scores in the two categories illustrated above. See if you agree with the dividend scores and company quality rankings that I came up with.
The companies are listed in reverse chronological order of their articles, beginning with August 2017 and ending with January 2016. I will discuss the highlighted companies below the table.
The eight companies highlighted in green scored at least 7.9 points combined in the two categories (out of 10 possible points). For my next purchase, I will pick from among those. (It is possible that I will instead choose to buy more shares of a stock I already own, but my current intent is to choose from this list.)
Next, I insert the companies’ yields and Morningstar’s star-rating valuation. (My complete method for determining valuation includes not only Morningstar but several other factors. See this article for a full description.)
I color-coded the two new columns, using the same color schemes that I use in the Dividend Growth Stock of the Month articles. Based on these two new columns, I will eliminate Starbucks (SBUX) (yield too low) and Boeing (BA) (poor valuation) from consideration.
I will also eliminate PepsiCo (PEP), not because it is not a strong candidate, but because it already comprises 8.5% of the portfolio. That leaves me with these five candidates.
I will admit that three of these stocks have been on my radar for a long time, just based on my general familiarity with the universe of dividend growth stocks: Lowe’s, Amgen (NASDAQ:AMGN), and VF (NYSE:VFC). I think I will narrow my choices down to those three, recognizing that it is a subjective judgement to eliminate the other two.
There are a few additional factors to consider in addition to fleshing out the valuations. In my articles, I evaluate each company’s financials plus a few miscellaneous factors, one of which is beta. I like low volatility stocks just based on general principles. Let’s add to the table the financial scores I gave each company plus its current five-year beta.
I think I’ll eliminate Amgen because of its high beta. And, my guideline for this portfolio has been to require initial yields of at least 2.7%. If I follow that here, I would need to eliminate Lowe’s, even though it is a high-quality company with apparently the best valuation of the candidates. But for purposes of discussion, I won’t eliminate it just yet.
So, I’m down to two candidates.
I’ll make my final decision in the next week or two.
Assuming that you were picking from the starting universe of 20 stocks, which one would you pick? What do you think of the winnowing process described in this article?
Disclosure: I am/we are long BA, PEP, SBUX.
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.