The goal: I want to stay invested in companies which will grow dividend payouts year after year for a many years to come. And I want a consistent growth in their values along with the dividends as we progress with time. Stock market makes lot of noise with price fluctuations of these stocks. My goal is to remain focused, ignore the excess noise, take advantage of the noise and enhance my portfolio strength as I go forward. The idea is to create a new portfolio idea from ground and up, reorient the existing portfolio with a new focus and create even better value than what I have achieved.
Preamble is for young/new investors and investors with no financial background as to my reasoning why I do what I do. Others can skip to next header, if they want to save time.
Historical data collection and analysis is the first step. When I say 'Best Stocks For the Next Decade', I believe those stocks which have performed in the past is most likely to repeat success going into the future. It does not mean newer or young companies will not achieve this feat. Historically successful companies need not repeat their feat going into the future. So how do I go about and create a buy list?
First, I created a list of companies that paid increasing dividends year after year for more than 10 years. Though I will be comfortable with companies which paid increasing dividends for over 25 years, every later entrant into this list has a chance to climb the ladder with passing of years. These newer entrants are young and has chance to perform well as they mature. So I decided with 10 years cut off period to start with.
Why increasing dividends? The decrease in money value owing to inflation needs to be compensated with the increase in dividend payouts. The dividend income has to support future year's expenses which will go up with inflation.
Next I collected the previous 10 years financial data for each of these companies and analysed them.
The companies have to grow their revenue year after year to grow their income. But this may not be possible even for the best of companies in every year. So I calculated the Compound Annual Growth Rate (OTCPK:CAGR) over the previous 3 years, 5 years and 9 years period. A little more explanation on 'why I do what I do' of this process. I am able to get ready data of 'growth over previous year' or 'growth over previous 3 years' or 'growth over previous 10 years' and such data for all the previous 10 years. The last such data would have actually considered a 20 year data. This would also mean the previous two economic cycles would have been averaged. But I view unearthing such historical data could only mislead us. The world is changing, habits change, preferences change and we are evaluating for "the best stocks for the next decade". So I want to give more weight for latest data while at the same time not ignoring how the company performed during the last economic setback. Hence averaging the previous 3 years or 5 years or 10 years make sense for my views. End to end data distortions are reasonably avoided. I also computed how many years they grew over the previous years, a simple count to know consistency rather than actual data.
Next I did a similar and meaningful exercise with the Net Income, Gross Margin %, Operating Margin %, Net Income, EPS, Free Cash Flows Per Share, Dividend Per Share, Dividend Payout %, Debt-Equity Ratio, Shares count and such data.
The company needs to grow revenue to make more net income. It is comfortable to know that the growing income is coming without any major reduction in the Gross Income %. The company should have managed the costs to achieve these and allow the growth to percolate into the Net Income level. The net income % has to grow steadily with economy of scale. The benefit of these shall reflect in the growth of EPS. Often companies engineer a growth in EPS through shares buy back, while revenue or net income stagnates or even goes down. While shares buy back helps to increase the shareholder's value, it should not be the only way that EPS got improved. EPS growth lacking other fundamental growth cannot take us into "Next decade" or provide us long term success. So we need to dig deeper to find out the historical performance under each head so that we can be confident that our picks grow shareholder's value with passing of years.
A dividend payout ratio of 60% or less helps to increase dividend in years with muted growth going forward.
A Gross Margin of 30% or more indicates that the company is having a 'competitive advantage'. Similarly an Operating Margin greater than 10% strengthens that view. Companies with 'competitive advantage' can comfortably lead us into the next decade.
The Debt-Equity data provides us a broad insight into the companies financial standing. With lower Debit-Equity ratio, any M&A activities for expansion can be comfortably executed.
Cash flow is an important matrix, but I have not given much importance in the evaluation here. The cash could have been used in M&A activities, reduction of related loans or used to expand and for these reasons it need not be consistent.
I prepared a list of companies with the number of years they have been paying increasing dividends. I did a historical evaluation and assigned following scores to help me filter the list.
If a company had grown its revenue over the previous 3 years, 5 years and 9 years period, I assigned a value of 20.
If the company had grown its revenue a minimum of 6 times 'year over year' in the past 9 years, I assigned a value of 10 for its consistency.
If a company had grown its net income over the previous 3 years, 5 years and 9 years period, I assigned a value of 20.
If a company had grown its EPS over the previous 3 years, 5 years and 9 years period, I assigned a value of 20.
If the last dividend payout ratio is less than 60%, I assigned a value of 10.
If the company had grown its cash flow per share a minimum of 6 times year over year in the past 10 years, I assigned a value of 5.
If the TTM gross margin is 30% or greater, I assigned a value of 5.
If the TTM operating margin is 10% or greater, I assigned a value of 5.
If the TTM debt equity ratio is 1 or less, I assigned a value of 5.
I feel historical analysis alone do not lead us to successful picks. The market has a notorious way of drastically punishing short term draw backs.
If the TTM revenue is lower than the previous year's revenue, I assigned a negative 10 value. Same way I assigned negative 10 (-10), for each of net income (TTM), EPS (TTM) and forward EPS lower than those of respective previous year's data.
If the previous 3 years dividend growth rate (CAGR) is less than 3%, I assigned a negative value of 5 (-5).
If the previous 5 years dividend growth rate (CAGR) is less than 3%, I assigned a negative value of 10 (-10).
If the previous 9 years dividend growth rate (CAGR) is less than 3%, I assigned a negative value of 15 (-15).
Since dividend income and growth in dividend income to beat inflation is essential, the negative scores assigned for progressively weaker growth over longer periods is assigned.
The maximum assigned score can be 100. Importance is given for consistent growth in revenue (30 points), growth in net income and EPS (40 points), possibility for comfortable future dividend increases even in economically difficult years (10 points via payout ratio) and the balance 4 metrics taking 20 points. The last 30 positive points assigned is only to increase the comfort levels in my evaluation. While I am generally more comfortable with companies which have paid increasing dividend for 30+ years, the passing of years will bring the other companies to go up the list. So I want to keep a open eye while my preferences will be those higher in the list.
It is interesting to note that the following companies have paid dividends for over 100 years in a row, but somewhere along may not have increased the dividends to retain the coveted years count.
|Ticker||Company||Dividend Paid Since||No of Years||Increasing Dividend Growth Years|
|YORW||York Water Company||1815||203||15|
|SWK||Stanley Black & Decker||1877||141||49|
|PG||Procter & Gamble||1891||127||60|
|CHD||Church & Dwight||1901||116||11|
The point to note is that none have increased dividends ever since they started paying dividend and some are not even in the list of 10+ years dividend growing companies, even though they are paying dividends for over 100 years.
There are many companies who managed to stay in the list, showing many years of continuous dividend growth, with paltry increases, but they are filtered out with the scores assigned based on dividend distribution records. I would choose companies (from the work sheet) scoring a minimum of 60 to include in my shopping list for best stocks for next decade and beyond.
That I have constructed the worksheet with filtering ability, revisiting this time to time could help to weed out wrong picks and choose replacements. May be some more tweaking in the concepts and assigning scores can happen to better the list.
This is only half the work done. Deciding at what rate these stocks should be acquired to get most value accretion as we go forward, is a different topic. The worksheet linked as a static page might have many more columns related to valuation. They will undergo some changes going forward.
In the mean time I remain confident that even if I make a mistake with the entry valuation to buy any stock in my buy list, the same will catch up sooner or later and turn into a sound investment. I will also add a few more portfolio control such as none of the picks should exceed a 5% value of total portfolio value. I will also restrict the portfolio size to a max of 30 or 35 holdings and to a minimum of 15 or 20 depending on cash retained. I will proceed to acquire these without haste, waiting patiently for the right entry price.
Based on availability of time, I might come out with one more article as to how I decide my entry price for the shares in the shopping list.
Any worksheet which depends on data from the web might carry unknown errors. So care shall be taken to explore such data or make exceptions to include or exclude specific items. For example, I immediately noticed the ticker symbol LMT. While it was awarded 85 positive points, 30 negative points were also assigned. Since the estimated current year EPS as downloaded from yahoo finance shows a 5 cents lower EPS than EPS(TTM). Again the estimate for the forward year may not have been updated or I might be wrong in my assumptions. So I have to find more information. This type of errors could be present. I may have to tweak my evaluation to arrive at a better scoring methodology to arrive at more impressive list. The guidance is not an end. There could be exceptions and we might want to add few tickers based on future promises or expectations. So a few of these will be added to my shopping list. Example GIS, AMGN, GILD. Many would have written off GILD. But I like GILD to be in the list as I see promises of it maturing into a future dividend grower even it fails to perform like a block buster.
My Shopping List:
Since the work file is large with large number of columns and rows, I am providing a link to its static web page. Click on this to view it. You have to scroll horizontally and vertically to view the entire sheet.
The list shows all the companies with increasing dividend distribution year after year in the past 10+ years. The rows highlighted blue gets into my shopping list for value discovery. All these are not immediate buys at the current prices. These companies are the ones showing the promise that they will stay around, create value for investors and will continue to pay increasing dividends going forward into the next of decades.
My next article will be focusing on discovering a price for these tickers to get added into my intended new portfolio for next decade and beyond. I hope I will get time to present this article soon.
My immediate shopping list, as I have done some diligence in the past on these include ABBV, ADP, AMGN, CLX, GILD, GIS, GPC, HRL, JNJ, LMT, LOW, MDT, MKC, MMM, SJM, WBA. The value at which I will add these is not yet decided.
I am creating this portfolio in a taxable account for personal reasons. I do not want to complicated IRS returns. I like it simple. Hence for personal reasons, I will avoid REITs, LPs and ADRs. I believe there is enough value to be discovered in the remaining stocks which will help manage the portfolio. At a time when values are at elevated levels, I am going to find it difficult to get the stocks at my desired price. As a result, I might have to wait for long time and there will be excess cash in the portfolio. So I do have a game plan where I will try to capture some swing gains until my desired value is discovered for the stocks in my shopping list. This game plan will continue until I get either caught on a specific stock at a higher value than I desire or I gain 2x times the difference between my desired value and the current stock value before I decide to latch to it. Then I will switch to do the same with yet another script. If I am caught at a higher price and the prices went lower, I will still add when my desired price level is hit and wait to unload the higher cost one when the price catches up. So I will do this with limited scripts at a time using the cash float available and not exceeding per script limits and risk norms I establish. I might indulge in shorting weekly PUTS instead of actual trading, where even if I am caught, I will be inching closer to my target rates. As I wrote earlier, I am confident with the scripts choice and so will not worry if I am caught at a higher price in the short term trading act. This is a personal view which I do not recommend to others. Hence I do not want a discussion on the personal note. I request readers not to engage in any discussions on my personal note.
Views of Seeking Alpha members on the choice of these scripts, the filtering methodology and such concepts will be greatly appreciated. I will be happy if readers benefit from this article as well. I am already long in ABBV, AMGN, BF-B, CHD, CVS, GIS, GILD, GPC, HRL, JNJ, LMT, MDLZ, SBSI, SBUX, SJM, SO, TSN in my other portfolios and many of them with a long term view. I might enter or exit or do both in some of the tickers mentioned in this article or in the worksheet or go short by selling PUTs. I never go short on any shares directly or sell naked calls. Naked PUT shorting is indirectly a view of going in the long side.
Disclosure: I am/we are long ABBV AMGN AWR BF-B CHD DIN CVS GILD GIS GPC HRL JNJ LMT MDLZ SBSI SBUX SJM SO.
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.
Additional disclosure: I might add positions or trade short term or exit in any of the tickers within 24 hours.