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The Most Undervalued And Overvalued Dividend Champions - January 2020

by: The Part-time Investor
The Part-time Investor
Long only, long-term horizon, dividend investing, value

A stock with a yield higher than usual may be undervalued.

A stock with a yield lower than usual may be overvalued.

Here is the latest month's list of the most undervalued and overvalued Dividend Champions based on a comparison to their historical yield.

I believe that anybody looking to invest in stocks must pay attention to the quality of the stocks, and the valuation. A poor-quality stock should never be bought, and you shouldn't pay too much for any stock, even a quality one. There are many ways to define quality, but for me, the simplest way is based on the company's dividend history. In my opinion, and remember, I like to keep things simple, any company that is a Dividend Aristocrat or a Dividend Champion is a quality company. Therefore, when looking at these companies, the next consideration would be their valuation.

This bull market has been going on for 10 years, and by many measurements, stocks are pretty expensive right now. But that doesn't mean that ALL stocks are too expensive to purchase. There are always undervalued stocks out there, and we must find a way to identify them. That is where PAAY comes in.

PAAY is a measure of how much a stock is above (high PAAY, undervalued?) or below (low PAAY, overvalued?) its usual yield, and can be an indication that the stock is mispriced. Many stocks can trade within a fairly consistent range of yields over time. But if you find a stock that is trading at a higher yield than it usually does, it may be an indication that it is undervalued. There can be two reasons for an above-average yield: the price is down, or the dividend has increased. Or, of course, it could be a combination of the two.

If the price is down, and yet the business prospects are unchanged, then this could be a good buying opportunity. If the dividend has increased, and the stock price has not yet risen to keep up with the increased dividend, this again gives you an opportunity to buy more shares and increase your dividend income at a relatively low price. Therefore, tracking the dividend yield and comparing it to the historical average of that stock can highlight times when it may be undervalued. I call this Percent Above Average Yield. Take the present yield, subtract the historical average yield, and divide the result by the historical average yield (and multiply by 100 to turn it into a percent) to come up with the PAAY. The higher the PAAY, the more undervalued the stock may be. The lower the PAAY, the more overvalued it may be.

When I make my decisions about reinvesting my dividends, I use the one-year PAAY to determine which of my stocks are most undervalued. The stocks in question are ones I already own, and I am therefore looking for opportunities where one or more of my stocks is down for a short period of time but may be expected to rebound. I'm looking to take advantage of short-term opportunities to add more shares. But others may be looking for longer-term trends. They may think that a longer-term yield average is more significant in terms of looking for investment opportunities and would therefore want to use a five-year average.

On the other hand, they may be thinking that some stocks may be overvalued and should be sold. In this case, the PAAY would be low. So, in this article, I present the top 10 PAAY stocks and the bottom 10 PAAY stocks from the Dividend Champions list for both the one-year and five-year periods. Stocks with high PAAYs may be candidates to be bought. Stocks with low PAAYs possibly should be avoided, or if already owned, might be candidates to be sold. Please note, nothing I present here should be considered a recommendation to buy or sell any stock. This is just meant to be a possible starting place for further research. Everybody should do their own due diligence when making transaction decisions. Just because a stock is on this list does not mean it definitely should be bought or sold.

The Dividend Champions list is the list of stocks which have raised their dividend for the past 25 years or more. It was started and maintained by David Fish for many years. David passed away last year, but, fortunately, the management of the list has been taken over by Justin Law, who is doing a wonderful job.

I trust him to maintain the list, and I assume that the information he presents is accurate. Any changes to the list are made by him. All historical price and dividend data used to calculate the PAAY were taken from Yahoo Finance and the Seeking Alpha historical dividend data. I attempted to correct any errors that I found or that were pointed out to me by others, including skewed results due to special dividends or stock splits, but if the info from Yahoo and Seeking Alpha is incorrect, it could affect the data presented here. You can look at my most recent article to see the list from November.

So, without further ado, here is the list of Dividend Champions as of Dec 31, 2019, with the highest and lowest one-year and five-year PAAY.

January's Champions Lists


I believe that a stock's present yield, when compared to its historical yield (either one-year or five-year), can be an indicator of either undervaluation or overvaluation, and is a good starting point for further research into possible purchases or sales. But I stress again that this is only a starting point. More research into any of these stocks is necessary to make any final decisions. The yield for any particular stock may be up because the business prospects for that company are in decline, and the inevitable dividend cut has just not been announced yet.

On the other hand, the yield may be up simply because the price is down due to global market forces unrelated to the business prospects of that particular company. Or the company may have just recently raised its dividend, and the stock price has not caught up yet to the increased payout. It is up to the individual investor to try to determine which of these is the case. But by using PAAY, you may find some opportunities that you otherwise would have been unaware of. And since these are all Dividend Champions, they have all shown a strong dividend culture and dividend payment history, which makes them worthy of further investigation.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am/we are long SKT, TGT, SYY, WBA. 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.