While this is the first time I am creating my monthly watch on BuildingIncome.Investments this is no where near the first time I am performing this exercise. I had been creating some form of this stock screen for years on my old blog, MyJourneytoMillions. While the account was growing nicely, I ended up raiding it down to a measly $10,000 to pay down debt…and this is where I start this blog!
I want to buy a tiny portion of a fairly valued business that has paid out an increasing dividend for at least twenty years. In an effort to do that I take the dividend champion (25+ years of increasing dividends) list add it to a portion of the dividend contenders (10-24 years of increasing dividends, I use 20+), and then apply the following metrics:
- P/E under 20, and no matter what lower than the industry average;
- A larger operating margin than the industry average;
- P/B under 4, or if over 4 then less than the industry average;
- Dividend yield of 2.5% or above; and
- Payout ratio below 60%
All definitions and explanations can be found in my methodology to find undervalued dividend growth stocks.
Creating my May 2016 Dividend Growth Watch List
First Stock Screen: PE Ratio
The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average. I also eliminate companies with PEs above 20 regardless of their industry average. This usually brings me from 150 or so equities to about 50, and this month was no different:
Second Stock Screen: Operating Margin
Next I eliminated those stocks whose operating margin was not better than its peers in the industry. I want the companies I invest in to be more profitable than their peers. This way unless there is a huge problem with the industry they’d be less likely to stop doing something (i.e. paying increasing dividends) that they have been doing for the past 20+ years
Third Stock Screen: Reasonable Price to Book or in line with their Industry
I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued. In an effort to limit the unintended consequence of choosing stocks with a lot of tangible or financial assets on the books I have started comparing the P/B to the industry average.
Fourth Stock Screen: Yield
While I am not ‘chasing yields’ I am attempting to create a dividend portfolio, so the next elimination step was to remove any stocks with a dividend yield of less than 2.5%.
Fifth Stock Screen: Payout Ratio
Next, I eliminated those equities whose payout ratio was 60%+.
Dividend Growth Stock Watch List for May 2016
AT&T Inc. T
Cincinnati Financial CINF
Community Trust Banc. CTBI
Dover Corp. DOV
Eagle Financial Services EFSI
First Financial Corp. THFF
Sonoco Products Co. SON
T. Rowe Price Group TROW
Target Corp. TGT
Wal-Mart Stores Inc. WMT
Northeast Indiana Bancorp NIDB
Arrow Financial Corp. AROW
Cullen/Frost Bankers CFR
NextEra Energy NEE
Chesapeake Financial Shares CPKF
I will then take a look at these companies and discuss my purchase.