By The Book I : The Ben Graham Dividend Strategy

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Includes: ARCC, BGS, BXG, CATO, CODI, CYD, JHG, KSS, NTB, PACW, PKX, RIO, SPTN, SWM, SYX, TX
by: Fredrik Arnold
Summary

The Graham strategy contains ultra-stable stocks that rarely lose money over a long period of time. It's strategically based on his "Defensive Investor" screen in his book, The Intelligent Investor.

25 of 35 Graham Strategy stocks tracked by YCharts showed dividends >4% as of 8/2/19. Top-ten ranged 6.42-9.62% by yield and ranged 33.47-119.87% by broker price-target-upsides.

Ten top net gain Graham Strategy dividend dogs boasted broker-estimated net gains from 26.83% to 125%.

$5k invested in the lowest-priced five top-yield Ben Graham Formula-selected dividend dogs showed 37.63% more net-gain than from $5k invested in all ten. Little low-priced Graham-select dogs ruled this pack.

YCharts explains it selects stocks daily based on the Graham Defensive Investor screen, stocks are sought that "are large in terms of sales and total assets, have a strong track record of earnings and dividend payments, have a reasonable current ratio and level of long term debt, and that have a low valuation given by PE Ratios and Price to Book Value ratios."

Foreword:

A previous series of articles looked at (1,2, & 3) billionaire and hedge fund holdings beginning with 50 Kiplinger stocks selected from individual holdings of high net worth notables as penned by James Brumley, an author for Kiplinger.

Then (4) we surveyed Warren Buffett and his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) collection of dividend dogs, followed by (5) a survey of 61 Solid Goldman Sachs (NYSE:GS) dividend holdings, and then (6) looked at the dogs of BlackRock (NYSE:BLK), the world's biggest manager of fund holdings, went on to (7) survey Soros Fund holdings, and finished with a look at (8) Neuberger Berman equities, and (9) Renaissance-Medallion dividend stocks.

This new series to be submitted over the next several weeks looks at five essential published investment strategies named for Ben Graham, Peter Lynch, Large Cap Value, Growth at a Reasonable Price, and Dividend Power.

Actionable Conclusions (1-10): Analysts Estimated 26.83% To 125% Net Gains For Ten Top Graham Selected Dividend Dogs By August 2020

Four of ten top Graham Selections by yield were among the top ten gainers for the coming year based on analyst 1-year target prices. (They are tinted gray in the chart below). Thus, this yield-based forecast for Graham formula selected dogs was graded by Wall St. Wizards as 40% accurate.

Projections were based on estimated dividends from $1000 invested in each of the highest yielding stocks and their aggregate one-year analyst median target prices, as reported by YCharts. Note: one-year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to August 2, 2020, were:

Source: YCharts.com

China Yuchai International (CYD) was projected to net $1,250.43, based on the median of target price estimates from three analysts plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 78% more than the market as a whole.

Systemax Inc. (SYX) was projected to net $594.73, based on a median of target price estimate from two analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risks 88% less than the market as a whole.

SpartanNash Co. (SPTN) was projected to net $528.35, based on the median of target price estimates from eight analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risks 37% more than the market as a whole.

Ternium S.A. (TX) was projected to net $488.83, based on dividends, plus the median of target price estimates from fifteen analysts, less broker fees. The Beta number showed this estimate subject to risks 40% less than the market as a whole.

Bluegreen Vacations Corp. (BXG) was projected to net $454.08, based on dividends, plus the median of target price estimates from three analysts, less broker fees. A Beta number was not available for BXG.

Bank of N.T. Butterfield & Son Ltd. (NTB) netted $357.27 based on the median of estimates from six analysts, plus dividends. A Beta number was not available for NTB.

POSCO (PKX) was projected to net $309.17, based on the median of target estimates from 21 analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risks 3% more than the market as a whole.

B&G Foods, Inc. (BGS) was projected to net $291.91, based on dividends, plus the median of target price estimates from eight analysts, less broker fees. The Beta number showed this estimate subject to risk 46% more than the market as a whole.

Kohl's Corp. (KSS) was projected to net $284.93 based on dividends, plus the median of target estimates from twenty-three brokers, less transaction fees. The Beta number showed this estimate subject to risk equal to the market as a whole.

Schweitzer-Mauduit Int'l (SWM) was projected to net $268.31, based on dividends, plus a mean target price estimate from two analysts, less broker fees. The Beta number showed this estimate subject to risk 57% above the market as a whole.

The average net gain in dividend and price was estimated at 48.28% on $10k invested as $1k in each of these ten stocks. These gain estimates were subject to average risks 21% less than the market as a whole.

Source: chewonthis.maddiesfund.org

The Dividend Dogs Rule

Stocks earned the "dog" moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More precisely, these are, in fact, best called "underdogs."

The Ben Graham Selections For August 2019

How did this collection of 35 Graham select dogs come to be?

It was developed based on the "Defensive Investor" screen in Graham's book The Intelligent Investor. It selects stocks that have large sales and total assets, have a strong track record of earnings and dividend payments, have a reasonable current ratio and level of long-term debt, and that have a low valuation given by P/E Ratios and Price to Book Value ratios.

35 Graham Selections By Target Gains

Source:YCharts.com

35 Graham Selections By Yield

Source: YCharts.com

Actionable Conclusions (11-20): 10 Top Graham Strategy Stocks By Yield

Top ten Ben Graham stocks selected 8/2/19 by yield represented five of eleven Morningstar sectors.

Top dog was one of two consumer cyclical sector representatives in the top ten, The Cato Corp. (CATO) [1]. The other consumer cyclical representative placed seventh, Bluegreen Vacations Corp. [7].

Two consumer defensive representatives placed second and fourth, B&G Foods Inc. [2], and SpartanNash Co. [4].

Three financial services Soros Fund holdings placed third, sixth, and ninth: Ares Capital Corp. (ARCC) [3]; Janus Henderson Group PLC (JHG); PacWest Bancorp (PACW) [9].

Two industrials sector representatives placed fifth and tenth on this list, Compass Diversified Holdings (CODI) [5], and China Yuchai International Ltd [CYD] [10].

Finally, a basic materials firm placed eighth, Rio Tinto Group (RIO) [8], to complete the Ben Graham selected top ten dogs by yield.

Actionable Conclusions: (21-30) Top Ten August Ben Graham Formula Selected Dogs Showed 21.7-119.62% Upsides While (31) No Downsiders Were Included

Source: YCharts.com

To quantify top dog rankings, analyst median price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high-yield metrics, analyst mean price target estimates became another tool to dig out bargains.

Analysts Forecast A 37.63% Advantage For 5 Highest Yield, Lowest Priced Graham Selected Dividend Stocks To 2020

Ten top Graham dividend dogs were culled by yield for this update. Yield (dividend/price) results provided by YCharts did the ranking.

Source: YCharts.com

As noted above, top ten Graham Formula Selected dividend dogs of 8/2/19 showing the highest dividend yields represented five of eleven Morningstar sectors.

Actionable Conclusions: Analysts Predicted 5 Lowest-Priced Of The Top Ten Highest-Yield Graham Dogs (32) Delivering 48.85% Vs. (33) 35.49% Net Gains by All Ten Come August 2020

Source: YCharts.com

$5000 invested as $1k in each of the Ben Graham selected kennel by dividend yield were predicted by analyst 1-year targets to deliver 37.63% more gain than $5,000 invested as $.5k in all ten. The third-lowest priced selection, China Yuchai International Ltd., was projected to deliver the best net gain of 125.04%.

Source: YCharts.com

The five lowest-priced top-yield Graham Formula Selected dividend dogs as of August 2 were: SpartanNash Co., Bluegreen Vacations Corp.; China Yuchai International Ltd.; The Cato Corp.; Ares Capital Corp. (ARCC), with prices ranging from $9.40 to $18.44.

Five higher-priced Graham Selected dividend dogs as of August 2 were: Compass Diversified Holdings; Janus Henderson Group PLC; B&G Foods Inc.; PacWest Bancorp; Rio Tinto, whose prices ranged from $18.91 to $53.28.

The distinction between five low-priced dividend dogs and the general field of ten reflected Michael B. O'Higgins' "basic method" for beating the Dow. The scale of projected gains based on analyst targets added a unique element of "market sentiment" gauging upside potential. It provided a here-and-now equivalent of waiting a year to find out what might happen in the market. Caution is advised, since analysts are historically only 20% to 80% accurate on the direction of change and just 0% to 20% accurate on the degree of change.

The net gain/loss estimates above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Stocks listed above were suggested only as possible reference points for your By The Investment Book Picks stock purchase or sale research process. These were not recommendations.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.indexarb.com; YCharts; finance.yahoo.com; analyst mean target price by YCharts. Dog photo: chewonthis.maddiesfund.org

Disclosure: I/we 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.

Additional disclosure: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.