Every month I review Dave Fish's list of dividend paying stocks and perform sorts to see what new investment opportunities the updated data provides. It is my hope that I can find a few more candidates to add to my dividend growth investment portfolio.
While the Dividend Champions (25+ years of continuous dividend increases) list has few surprises, the Dividend Contenders (10-24 years of continuous dividend increases) list is more interesting for who makes it through the filter and who doesn't.
To start my screen, I import Dave's Excel data into Filemaker Pro, where I have a script that omits non-qualifying stocks, and highlights those stocks that fail a few other screens, but doesn't omit them from the pool of candidates. All told, this whittles down the Champions and Contenders to a manageable list for further research.
My screen is done in two batches: 1) Using the Dividend Contenders data, and 2) Using the Dividend Champions data. I break it up into two categories so as to manage the two types of securities each batch represents. The Contenders have just a 10-24 year track record of increasing dividends, while the Champions have a 25+ year track record. As a result, I believe they represent two types of companies with different risk profiles. So I break them apart and allocate less money to the Contenders than I do to the Champions - my little illusion that I'm reducing risk that way.
Here is the criteria that I apply to the raw pool of data provided by Dave:
- Minimum yield required is 2.5%. Yes, it should be 1.5 times the S&P's dividend yield according to the Chowder Rule, which I firmly believe in (which as of this writing would require a minimum yield of 2.95%). However, I don't want to eliminate a great stock just on the basis of yield alone, since dividend growth is also critical, and another part of the Chowder Rule. So arbitrarily I set the minimum yield to 2.5%
- Minimum Yield + 5 Year Dividend Growth Rate required is 11% for Champions and 11.5% for contenders, as I require a higher return due to what I perceive is a higher risk with "newbies" who have only demonstrated their commitment to dividends for 10-24 years.
- Minimum 12 years of increasing dividends for Contenders. My theory is that in 12 years the company should have weathered 3 economic cycles. If they are still paying dividends after 12 years, management must know what they are doing and be commited to dividend payments to their owners.
- Payout Ratio must be less than 70%. Yes, the real threshold should be at 60% according to most sources. FileMaker Pro highlights in red any payout ratio over 60%. However, some great companies have a payout in the 60-70% range and I would hate to eliminate them based on one criteria. A payout that high, though, doesn't leave much wiggle room, so the risk is noted. It's also important to note that REITs and Utilities frequently have higher payouts, so I do comb back through Dave's data to see if I am missing any opportunities.
- Five (5) year Trailing EPS growth must be positive. Those stocks that don't have a positive 5y EPS growth rate are omitted, as without earnings growth, dividend growth is called into question.
That's the initial screening criteria. From there, each security is run through a few more checks to see if they pass or fail. These checks simply highlight if the stock doesn't make the mark; it's not eliminated from the filter. The checks are:
- 10 year dividend growth rate is to be above 5%
- 3 year dividend growth rate is to be above 5%
- 1 year dividend growth rate is to be above 5%
- Price/Earnings ratio is to be below 20.5
- Negative EPS growth in the last year is noted
Finally, the remaing securities are ranked by yield, payout ratio, beta, 5 year dividend growth rate. The results of the ranking are sorted by their score (lowest wins) and then by their Chowder number (yield + 5y Dividend Growth Rate). And that, my friends, brings us to the end of the screening process that hopefully 'yields' a few bright opportunities.
From this point forward, I would look at the candidates by sector so as to round out the diversity of my portfolio. I do further research to uncover the Dividend Coverage Ratio (must be over 1.2), the Current Ratio (must be over 2.0), and the revenue growth rate for the trailing 12 months (should be positive).
May 2015 Dividend Champions
Selected Candidates for Further Research
|WMT Walmart||15.24% Chowder number, low payout ratio of 40.1%. TGT Target came in 2nd in the Consumer Staples sector, but has higher debt, higher beta, higher PE, and negative TTM EPS.|
|HP Helmerich & Payne, Inc.||71.12% Chowder number, payout ratio of 41.2%, dividend yield of 3.77%, low PE, low debt/equity ratio, and dividend growth that is accelerating. Looks promising just from the numbers, but research will tell.|
|TROW T. Rowe Price||14.55% Chowder number, payout at 46.6%, yield of 2.58%, and zero debt, impressive trailing 5y EPS growth rate.|
|MMM 3M Company||13.46% Chowder number, accelerating dividend growth, payout still below 60%. Only downside in the numbers is a high PE.|
|STR Questar||11.93% Chowder number, accelerating dividend growth, and a low beta. Payout is over 60%.|
May 2015 Dividend Contenders
Selected Candidates for Further Research
|HAS Hasbro||18.68% Chowder number, 2.55% yield, but high debt/equity of 1.24, and payout closet to the limit at 57.5%|
|OTCPK:CZFS Citizens Financial||14.93% Chowder number, low 29% payout ratio, 0.32 debt/equity ratio, and a low PE. Less that 5 million shares in circulation.|
|LMT Lockheed Martin||21.78% Chowder number, low beta, and high ROE.|
|IBM International Business||17.67% Chowder number, low beta, low payout, low PE, just high debt/equity at 3.2.|
|QCOM Qualcomm Inc.||21.92% Chowder number, 45.5% payout ratio, virtually no debt, and a low PE.|
|WEC Wisconsin Energy||21.74% Chowder number, very low beta, accelerating dividend growth, payout ratio of 66.5%|
I hope this proves helpful and interesting to others. It would be great to hear your comments and suggestions on my process and how it could be changed, improved, scrapped, etc.
Disclosure: The author is long LMT, QCOM, TROW.