A New Dividend Champions, Contenders, And Challengers List With Actionable Added Value Metrics

May 15, 2020 1:55 PM ETKLAC, KR, NOC227 Comments
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FerdiS
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Summary

  • We introduce Dividend Radar, a weekly automatically generated version of the Dividend Champions, Contenders, and Challengers.
  • Using a rules-based automated approach and verified, broker-grade data ensures greater accuracy and consistency than otherwise would be possible. Furthermore, a comprehensive list can be generated more frequently.
  • We use actionable metrics in Dividend Radar to source three buying opportunities in the current down market for your further research.
  • Our pledge: Always free for individual and commercial use, no registration required.

This article was co-produced with James Marino Sr of Portfolio Insight.

Dividend Radar is an automatically generated version of the Dividend Champions, Contenders, and Challengers. We use a rules-based and automated system to create and maintain the list using verified, broker-grade data. The approach ensures greater accuracy and consistency than otherwise would be possible. Moreover, a comprehensive and up-to-date list can be generated more frequently, bringing significant benefits to active dividend investors.

Our plan is to publish weekly on Friday as a free resource for dividend investors.

Background

The Dividend Champions [CCC] list contains more than 800 dividend growth [DG] stocks trading on U.S. exchanges that have paid higher dividends for at least five calendar years. Created by the late David Fish and now maintained by Justin Law, the CCC list is an invaluable source for dividend investors.

We've used the CCC list extensively for over ten years and are indebted to David Fish for his pioneering and innovative work. The list narrows down a sea of potential investments based on the notion of a dividend streak, which David first defined as Dividend Champions for paying 25 consecutive years of higher dividends. Later, he expanded the list to include Contenders (10 years) and Challengers (5 years).

Why Automate?

Done manually and maintaining a list of more than 800 DG stocks is a formidable task. And ensuring accuracy, consistency, and comprehensive coverage would be almost impossible, especially if attempting such updates more frequently than once a month.

In 2018, Portfolio Insight started building a web application to help active investors manage their portfolios. We needed a way to benchmark our platform for quality and accuracy, so naturally, we selected the CCC list. After considerable time and effort, we succeeded in computing dividend streaks for the universe of stocks traded on U.S. markets daily.

Getting there turned out to be a lot harder than we'd imagined. After verifying our results and comparing them to the CCC list, we discovered several inconsistencies between the lists. Automation yielded not only more accurate results but also more complete results. For example, our list contains more Contenders than the CCC list.

While automation offers significant benefits in creating and maintaining a dividend streak list, it also allows including metrics that would be difficult to calculate manually. For example, including up-to-date dividend growth rates [DGRs], fair value estimates, and trailing total returns for all DG stocks is now possible. Furthermore, having a platform will support future enhancements.

Guiding Principles

At the outset of our automation journey, we adopted a set of guiding principles:

  1. Ensure full transparency of all calculations.
  2. Adhere to a rules-based approach that is consistently applied to each stock.
  3. Act as an independent source and an advocate for dividend investors.
  4. Favor inclusion in dealing with exceptions.

These guiding principles recognize important aspects that make a list of dividend streaks valuable to dividend investors: it should be clear, consistent, accurate, and comprehensive.

Principle 3 is particularly important when creating an automated system. Since data integrity is critically important, we acquire data from a leading provider in the industry. While their data are more accurate than other sources we explored, we discovered inaccuracies with some of the dividend information they provided. Examples include missing payments, miscategorized special and recurring dividends, and incorrect payment amounts. We spent months working with our data provider to clean up such inaccuracies and to restructure the data to break out detail, such as return on capital dividend payments.

In the process, we learned that not all data are created equal. We now cross-reference multiple sources and have the ability to identify and correct errors.

Rules-Based Approach

After consulting with focus groups, we developed the following rules-based approach to ensure transparency and consistency of results:

  1. Determine the dividend streak using up to 10 different bases and retain the longest. Perhaps this is a little-known fact, but the CCC list uses one of ten different bases to determine a dividend streak. These include the ex-dividend date (Ex-Date), the Fiscal Year Ex-Date, the Payment Date, the Declaration Date, and the Adjusted Ex-Date, plus variations that include Special Dividends. We decided to keep the same bases and use the one that produces the longest dividend streak. Our spreadsheet includes a column to indicate the basis used for each stock.
  2. A dividend streak starts when a company completes one full year of payments. We normalized dividend data for when a dividend streak started, as well as for when it could be increased. For example, if a company made one payment in year one, its dividend streak would begin when it completed one full year of payments, in this case, in year two. One benefit of using a direct market data feed is that we can update a dividend streak more quickly based upon the annualized amount of the current payment.
  3. With spin-offs, the former parent's dividend streak continues if it does not cut its dividend at separation. There is no universally accepted way to handle spin-offs, and based on focus group feedback, we decided to terminate a company's dividend streak if it cuts its dividend at separation. Furthermore, the subsidiary would not inherit the former parent's dividend streak. We chose this approach because it does not require any alteration to the underlying data. Therefore, users are free to choose their preferred method of handling spin-offs.
  4. Mergers are typically handled by adopting the dividend history of the majority partner. Mergers of equals will be handled on a case-by-case basis. In general, mergers are hard to automate, especially of substantially equal partners. In these cases, the automation platform can be overridden to label one of the merging partners as the majority partner, thereby adopting its dividend history.
  5. Stock splits and payments are aligned using the ex-date. It is standard practice to use the ex-date to determine when the company becomes legally obligated to the dividend investor. Treating stock splits correctly is essential when calculating Total Trailing Returns and Dividend Growth Rates. We group dividend payments by ex-date into twelve-month periods, split adjust the payments, and then perform the calculations.

We invite and welcome feedback, particularly if there are scenarios you believe the above rules do not adequately address.

Key Findings

We generated the Dividend Radar list and compared it to the CCC list dated 4/30/2020. The comparison highlights several differences. Some differences stem from our rules-based approach, for example, the way we trigger the start of a dividend streak and when a dividend streak is increased. Other differences appear to be the inevitable result of a tedious, manual process.

Please note that in sharing these findings, we are not criticizing the generous and diligent work of those that have come before us; instead, we want to highlight the benefits of using a rules-based, automated process:

  1. Significant differences: dividend streaks differ by at least two years (48)
  2. Minor differences: dividend streaks differ by at least one year (308)
  3. New members: DG stocks in the Dividend Radar list but not in the CCC list (49)
  4. Broken streaks: Stocks not in the Dividend Radar but listed as DG stocks in the CCC list (34)

Please note in comparing the lists, we excluded OTC (Over-the-Counter) stocks since those stocks currently are not included in the Dividend Radar.

As far as we know, our version of the Dividend Champions, Contenders, and Challengers, is the only one that is generated automatically, and we are confident that it is the most accurate and complete list of its kind available.

Additional Data

While the dividend streak is an important metric, it is only one of several metrics that dividend investors like to consider when evaluating DG stocks.

First and foremost, since Dividend Radar is automatically generated and published every week, the data will be fresh and considerably more actionable. Moreover, several metrics are calculated on a trailing twelve-month (TTM) basis, including all of the fundamental data provided.

Screenshot showing streak and dividend data for a selection of DG stocks

We believe having access to data that are updated weekly, rather than monthly or once per calendar year, will be tremendously valuable to dividend investors. For example, Dividend Radar provides 1-, 3-, 5-, and 10-year DGRs calculated on a TTM basis, so the Chowder Number [CDN] also will be as up-to-date as possible.

Dividend Radar includes many of the data items in the CCC list, but not all of them.

For example, we replaced the fundamental data section in the CCC list entirely with more relevant fundamental data, calculated on a TTM basis using market feed data and company filings. The fundamental data are organized around performance, profitability, financial strength, and valuation metrics:

  • Performance:
    • EPS 1Y - TTM basic EPS growth
    • Revenue 1Y - TTM total revenue growth
  • Profitability:
    • NPM (Net Profit Margin) - TTM net income/total revenue
    • CF/Share (Cash Flow/Share) - TTM cash from operations/basic weighted outstanding shares
    • ROE - TTM return on equity
  • Financial Strength:
    • Current R (Current Ratio) - TTM total current assets/total current liabilities
    • ROTC - TTM return on total capital
  • Valuation Metrics:
    • P/E - TTM P/E
    • P/BV - TTM price/book value
    • PEG - TTM historical growth; calculated using P/E / (5-year basic EPS CAGR)

Screenshot showing fundamental data for a selection of DG stocks

Also, we took the opportunity to remove data that are easily calculated from other columns, and data that was deemed to be of little use to most dividend investors.

A Dividend Radar Mapping Guide is available that illustrates these changes.

Added Value

Feedback from focus groups indicated the need for additional metrics, especially fair value and trailing total returns. We decided to include these metrics now and add additional features to benefit the dividend investing community later.

For fair value, Dividend Radar indicates whether a DG stock's price is Above Fair Value, At Fair Value, or below fair value (In the Margin of Safety). We view fair value as a range, so a DG stock is At Fair Value if the current price falls within the fair value range.

Screenshot showing fair value indicators for a selection of DG stocks

To determine the fair value range of a DG stock, we compute two prices. The first is obtained by multiplying the current EPS by 15. The second is more involved and considers EPS data and daily closing prices for the trailing 10-year period. To obtain the second value, we multiply the current EPS by the average P/E ratio of the stock over the trailing 10-year period. The pair of computed prices determine the DG stock's fair value range. (For REITs, we use AFFO instead of EPS).

Screenshot of the fair value range history of McCormick & Company, Incorporated (MKC) Source: Portfolio Insight

For trailing total returns [TTR], Dividend Radar provides 1-year and 3-year totals for each DG stock in the list. This metric adds the returns due to stock price appreciation (or depreciation) and dividend payments over the given time frame.

Screenshot showing DGR and TTR data for a selection of DG stocks

Determining trailing dividends is done by grouping dividend payments by ex-date into trailing twelve-month periods, split-adjusting the payments, and then performing the compound annual growth rate calculations.

A Dividend Radar Data Dictionary provides details on all calculations and metrics.

Using Added Value Metrics to Derive Actionable Opportunities

Let's turn to how the added value metrics included in Dividend Radar (and not available in the CCC list) can be used to screen for actionable opportunities.

The Leaders tab in our spreadsheet details the top 25th percentile of stocks based on one-year TTRs. There are sections for Champions, Contenders, and Challengers.

Screenshot showing added value in Leaders tab

TTRs are calculated using the latest closing price and most recent dividend payments. This means the range of top-performing TTRs will be different in today's market than before the market downturn. By focusing on the top 25% of performers, we can immediately focus on the best opportunities available today.

Next, we consider fair value, looking only for stocks in the margin of safety or at fair value.

In the list of Champions, only four stocks qualify, Artesian Resources Corporation (ARTNA), Cardinal Health, Inc. (CAH), RenaissanceRe Holdings Ltd. (RNR), and T. Rowe Price Group, Inc. (TROW). These stocks have one-year TTRs of 5% or less. Even in the current environment of lowered expectations, these returns are on the low side when compared to other Champions with one-year TTRs as high as 39%. Perhaps the Champions are not the best place to look for immediate opportunities.

The Leaders tab also ranks Challengers. However, we'll pass on those as many of the top members are trading above fair value, such as Apple Inc. (AAPL) with its one-year TTR of 36% and lesser-known members have a limited dividend track record during recessions.

That leaves us with the Contenders. Sixteen members are in the margin of safety or at fair value:

Notice that two of the stocks listed above have negative total trailing returns and they are still in the top 25% of the Contenders. That's an indication of how volatile today's market is.

To narrow down the list, we run additional screens. We look for stocks with a CDN of at least 12. We calculate the CDN using the 5-year dividend growth on a TTM basis, plus the annualized yield.

Three stocks stand out: KLA Corporation (KLAC), The Kroger Co. (KR), and Northrop Grumman Corporation (NOC). After consulting additional metrics in Dividend Radar, we can present the following summary:

Trailing Total Returns

Ticker

Chowder Number

No Years

TTR 1YR

TTR 3YR

KLAC

13

11

23%

18%

KR

15

14

25%

3%

NOC

16

17

14%

10%

All three stocks have improved their performance in the last year despite the market downturn. Based on these results, KLAC, KR, and NOC are promising opportunities that merit your further research.

Benefits of the Dividend Radar

  • Free for individual and commercial use
  • Based on broker-grade data that is verified for consistency
  • Fully automated to avoid manual counting errors and inconsistencies
  • Produced every Friday with current market data
  • Modernized and streamlined, with added value components
  • Up-to-date DGRs calculated on a trailing twelve-month basis
  • More accurate and relevant fundamental data
  • Built on a platform that will support future enhancements

Our goal is to add additional features. Please let us know if you have any ideas or suggestions.

Community Involvement

Our vision for Dividend Radar is to evolve and enhance it through a strong community effort, which, in turn, will further our goals of transparency and acting as an advocate for the dividend investor.

To this end, we are releasing Dividend Radar under the Creative Commons - Share Alike License. This license allows Dividend Radar to be used for both individual and commercial purposes. It ensures that Dividend Radar will not be put behind a paywall and embodies the spirit of pay it forward: if a company enhances and releases the list, they must do so under the same (free) terms as the original Dividend Radar. This guarantees that the community will continue to receive benefits for their support in the future.

Please note that the terms of the CCC list prohibit its commercial use.

We also invite collaboration, so we've set up a form to submit issues here and a publicly accessible issue list here for the community to track and comment on issues related to company dividend streaks.

Our long-term goal is to encourage adoption by having Dividend Radar serve as a basis for spin-off lists. Individuals or companies can take the contents of Dividend Radar, add their own metrics, and share their value-added lists with the community.

We're excited to hear your feedback, suggestions, and ideas.

Getting Started

Please click on the link below to download your copy:

Additional documents available for download (at the same link as above):

  • The Dividend Radar Data Dictionary
    • describes all calculations and metrics contained in the Dividend Radar.
  • The Dividend Radar Mapping Guide
    • details how columns in the CCC list map to the Dividend Radar.

Historical copies of the Dividend Radar will be available at:

Thank you for reading!

This article was written by

FerdiS profile picture
26.16K Followers
FerdiS invests in dividend growth stocks and writes options to boost dividend income. He manages DivGro, a portfolio of mainly dividend growth stocks created in January 2013. With investment and trading experience spanning nearly 20 years, FerdiS enjoys writing articles about dividend growth investing, options trading, stock selection, portfolio management, and passive income generation. His DivGro blog hosts more than 1,000 posts and a live, public spreadsheet with full details of his DivGro portfolio, allowing readers to follow along in his investment journey. FerdiS is collaborating with the founders of Portfolio Insight, an online platform for portfolio management and investment analysis. Together, we maintain and publish Dividend Radar, a free spreadsheet of dividend growth stocks, on a weekly basis.

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: The author is collaborating with James Marino of Portfolio Insight to create, maintain, and publish the Dividend Radar Champions, Contenders, and Challengers on a weekly basis. We're excited to help bring this valuable resource to the Seeking Alpha and broader dividend growth investment community.

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