Scoring that includes yield, dividend growth and safety

[rnsmth]

I read a fellow tonight on another board who - well, first do folks know what a Chowder number is?  It is now a part of the CCC list. It is the current yield + the 5 yr dividend growth rate.  So, a company that paid 3% current yield and had a 5 year growth rate of 12% would have a Chowder number of 15.

That takes care of the Current yield and dividend growth part.  

Then he adds the Simply Safe Dividends safety number and comes up with one number to use to compare companies.

So, if the above company had a safety score of 70, its over all score would 85.

It sounds like it has Merit, but I need to take a closer look at it with companies in our portfolios (as a reminder, our portfolios refers to mine and the iWife's.

What do you folks think?

[mrw11g]

Current Yield is dividends
5 Year Growth is dividends
Dividend Safety is safety.

I don't see how you can combine different meanings into a single equation. There might be an answer, but that's my first take.

[rnsmth]

(12-14-2021, 09:40 PM)mrw11g Wrote: Current Yield is dividends
5 Year Growth is dividends
Dividend Safety is safety.

I don't see how you can combine different meanings into a single equation.  There might be an answer, but that's my first take.

It is called a scale.  It is done all the time in social and health science.

[fenders53]

From the example it would seem to greatly minimize the importance of yield and growth rate. Safety is important of course, but would a safe lousy yield get a high score? For example what score would a 0.5% yield that has grown at 20% and has a safety score of 80 be awarded? 100.5? That would be much better than a 4% current yield growing at 8%. I would much prefer the latter of course.

[crimsonghost747]

The issue with these kinds of things is not so much the math or the numbers used. It's the fact that what this guy is trying to do is impossible.
You cannot take a company, especially a massive company with millions of moving parts, and come up with a single number to describe the quality of the company. The whole logic is flawed.

Can these numbers be effective as general guidelines? Sure. I get that here you are looking at current yield + historical yield growth + dividend safety (which is already is not a factual number, but rather the best guess of some algorithm) and that will give you some sort of an idea about the historical performance of the company's dividend. But that is a tiny tiny part of a company, an important part sure, but ranking a company solely based on historical dividend data is not the right way to go in my opinion.

[ken-do-nim]

I personally don't like formulas that don't take stock price growth into account either.

[cemanuel]

(12-14-2021, 09:21 PM)rnsmth Wrote: I read a fellow tonight on another board who - well, first do folks know what a Chowder number is?  It is now a part of the CCC list. It is the current yield + the 5 yr dividend growth rate.  So, a company that paid 3% current yield and had a 5 year growth rate of 12%  would have a Chowder number of 15.

That takes care of the Current yield and dividend growth part.  

Then he adds the Simply Safe Dividends safety number and comes up with one number to use to compare companies.

So, if the above company had a safety score of 70, its over all score would 85.

It sounds like it has Merit, but I need to take a closer look at it with companies in our portfolios (as a reminder, our portfolios refers to mine and the iWife's.

What do you folks think?

I don't "score" when selecting dividend stocks, not as classically considered. Warning: This is long.

To start, here are my criteria (this is all copy/paste - last time this changed the formatting but I don't know enough to change it back - sorry!):

1. Companies are those which should be around for a long time
   
   
2. Companies should pay a dividend. Lately my criteria has been a yield of 2% or above.
   
   
3. Companies should have a history of dividend growth – I use the the late David Fish's DRIP Resource Site spreadsheets, now maintained by Justin Law, to find a list of Dividend Champions, Contenders, and Challengers. My goal is for the 5-year dividend growth rate to be above 6%. My floor level is five consecutive years of growth but right now I favor those with 13 years or more - this means they grew it during the Great Recession. But for companies with fewer years I will often track them longer term. To me there's a big difference between a company that had a dividend growth streak, froze it for 2-3 years during 2007-2010 and then resumed growth vs one that cut.
   
   
4. Companies should be undervalued or fairly valued. For most companies I assign a PE ratio of between 15 and 20 though there are some sector-specific differences and this is one where volatility may have an impact.
   
   
5. Companies should have a good balance sheet – not overly burdened by debt. I use debt to ebitda and compare within sectors. My ideal is a ratio of 1.5 or below but I am not worried at under 2.5. For some sectors such as utilities and pharma, I'm OK with higher.
   
   
6. Companies should have a sound payout ratio, I look for 70% or below over the past few years. 
   
   
7. Companies should have a recent history of revenue growth. My screen uses eps growth because this is what is most widely available but I want to be sure that this is not increasing due to buybacks. I also look at cash flows though usually revenues captures it. I want annualized 5-year growth to be 5% or above.
   
8. Beta - not really a buy metric, more awareness, see below.
   With that in mind, each quarter I run a screen. This is a cursory look at every stock I either own or have on my watch list. The screen includes (with preferred metrics where applicable):

• Yield: To date I have looked for 2% and above with a preference for 3%, this will change for the IRA
  
• Consecutive years raising the dividend based on David Fish's (now Justin Law's) CCC lists - 5 years minimum
  
• 5-yr DGR: Must be positive
  
• 5 yr eps growth: Must be positive
  
• Projected next (reported) full year eps estimate - I somewhat believe analysts up to 12 months out, not further
  
• Debt:ebitda: With a few exceptions (pharma, utes) 3.5 is a red light, 2.5 and below is what I want and ideal is under 1.5
  
• Payout ratio: Below 70%, ideal is 30-60, some exceptions such as utes
  
• Market cap: Large or mid-cap
  
• Beta: I have stopped using this as a buy metric (started out preferring low beta) for the most part, this is more to be aware of a stock's characteristic than anything. High beta may actually be good as the stock is likely to provide good dip-buying opportunities as I build a position going forward. Even with the recent dip I'm up over 300% on WSM.
  

Based on my numbers I then assign a price based on PE. My PE will depend on a variety of factors but will be between 15 and 20 depending on the results of the screen, with some exceptions such as telecom. For example, a company with over 10% 5-yr earnings and dividend growth, 10 consecutive years raising, a 1.3 debt:ebitda, and a payout ratio of 40% would likely rate a 20. One with 6% earnings and dividend growth, all other metrics the same, would get a 17.5. High yield and low DGR? A 15.

So that's the screen. Now the real work begins. Full details can be found in this very long blog post from July 2019: https://seekingalpha.com/instablog/48196...-companies

Once I have the screen and a company I don't own falls below my price while I have cash to buy I do what I call my deep dive. I at least review the company's last 5 years ARs, particularly the financial data and fully read at least the previous one. Things I look closely for:

• Revenues and cash flows: I have come across a LOT of companies with, say, a 5-year eps growth of 12% that turns into 3% revenue growth, almost always due to buybacks.
  
• Debt: If I like everything else about a company but the debt:ebitda is higher than I like, say 3, I check to see if there's a reason for the higher debt such as a recent acquisition and - the key - are they paying it down. A ratio of 3 that is dropping by 2 points a year is one thing, increasing means I don't want it.
  
• Business: Do I roughly understand what the company does? I've had companies - this is rare - where I read everything through and decide I don't know exactly what they're doing - not so much what they make/do but if it looks like management has a cogent plan.
  

Once I've done all this I may change my target price, decide to buy or even take it off my watch list.

The screen takes 10-15 minutes/company but it's a lot of companies. It's the better part of the day. I go to whatever site I pull my metric from and just change the stock symbol in the URL. Can fill a column pretty quick. Then I create a formula to calculate current price with next year eps to come up with a current PE.

The deep dive can take as little as an hour if it's a company I've been following a while or have done this for previously. It can take 2-3 though. In particular cyclicals and companies that have a lot of commodity exposure can get some variable revenue numbers. This is where I get into reading individual ERs to look for explanations such as input costs, supply chain issues, etc. I don't DQ these companies but I want to be aware and could adjust the target price downward.

So this is how I do it. 

Once I open the IRA, with 13 years before ever touching the money (and then only because an Uncle wearing a funny hat makes me) some of this will change. In particular, I have a lot of companies that yield under 2%. If I like them I still have run the screen, set a target price but then put in my notes column that it doesn't meet my yield requirement. It will be nice to let these out of "yield jail" this winter.

So I don't do any sort of scoring rubric. And 1-7 in the screen? I used to call various things rules. Now they're strong guidelines except for #1 and the first part of #2. In spring, 2019 I added a bunch of UNH at around $220 even though yield was under 2%. Just too good of a deal for me to pass up.

[fenders53]

Cemanuel.

This is an exceptional screen process. I strongly agree with your flexibility in #3. I'd love to own all aristocrats or better and some have done just that but that is too limiting for long periods of time due to valuation and other misses in your criteria. Finding a few of the future dividend stars can be lucrative. AAPL or MSFT may be the next generation's income stock at retirement.

I'll check out your blog post when I have time.

[cemanuel]

(12-15-2021, 07:15 AM)fenders53 Wrote: Cemanuel.  

This is an exceptional screen process.  I strongly agree with your flexibility in #3.  I'd love to own all aristocrats or better and some have done just that but that is too limiting for long periods of time due to valuation and other misses in your criteria.  Finding a few of the future dividend stars can be lucrative.  AAPL or MSFT may be the next generation's income stock at retirement.  

I'll check out your blog post when I have time.

Thank you. It does take time. And outside of any numbers consideration, once I've done this I feel reasonably familiar with the company. I also have an index card holder and fill out a card/cards for each company I own with characteristics I can refer to and track over time.

The amount of time I spend doing this and this secondary benefit is why, so far, I have not paid a penny for any investing service. I have to dig, go through more than 1 site for relevant numbers, and sometimes have to even do some math (payout ratio most often). But so far I like having done it (doing it is tedious, an accomplishment when finished). There may come a point where I look for a service that most closely approximates what I do but not right now.

[fenders53]

It might force you down rabbit holes to find out why an otherwise great company maybe deserves benefit of the doubt if they can't check a block for rational and temporary reasons.