Screening Criteria

[Ok Red]

I've made the decision to transition to a DGI portfolio. I've dabbled in asset allocation via index funds for over a decade, but it just seems kind of pointless at present. For instance, the asset allocation models for my age would have 50% or more of my portfolio in bond index funds, and with the taper in sight that is akin to playing Russian Roulette with six bullets - the question isn't whether you're gonna win or lose, it's how big the mess is gonna be. So, I'm going to make the transition to DGI and not have to stress as much about macro issues.

The goal? I'm 54 and my retirement window is 6-12 years from now. No, I don't really plan on retiring, but rather redirecting my energy. I may work part time in my current industry, or I may work full time at something new. The goal is to make my 'retirement' as comfortable as possible. I have a lot of flexibility in how long I work - my uncle is 83 and is still managing a couple of projects a year for EDF, so if it comes to it I'll just keep on working.

Advantages? Well, I have a Rollover IRA from my old 401K. I get a small military pension at 60. I get a pension from my former employer (large Utility company) at 65. I get full SS at 67. I have excellent cash flow from which I can create an after tax portfolio to help me muddle through between 60 and 65 if I so desire.

Disadvantages? I'm old. Yes, the good judgement that comes from age is nice, but it certainly limits my time horizon. Plus my forehead is a lot bigger than it used to be.

How am I gonna get there? Well, I'm currently developing screens that will allow me to identify stocks that I can purchase for the long haul. I am leaning towards higher dividend growth and lower yield for my initial purchases (foundation) and then branching into higher yield holdings (if necessary) as I get closer to screwing off (errr, retirement). I think that 15 to 20 core holdings would be adequate. Once the screens are satisfactory, I will start averaging in on the identified securities. A large portion of my portfolio currently in cash because weird sh*t is going on (QE, taper, bank stability, Europe, Japan, China, new Fed Chair, Royal Baby, etc) and that money is ready to deploy (slowly). I currently hold individual issue bonds, holding to maturity to eliminate interest rate fluctuations, and will continue to do so. I also anticipate that my international and emerging market exposure will continue to be thru dividend centric index funds/etfs (mostly wisdom tree).

What I'd be interested from the forum in is input on my screens. I'm using Portfolio 123 (on the 30 day trial). Most of these screening criteria are pure rectal extraction, or rather lightly educated rectal extraction. I regard feedback as a gift .

No ADRs
No OTC
Yield > 2%
Dividend Growth over 5 years > 10%
Payout < 80%
Debt to Equity < 50%
PEG < 1.5
Earnings Growth over 5 years > 8%

I then apply that screen (playing with the numbers but not the criteria) across a specified group of stocks - all stocks, all stocks excluding micro caps, Russell 3000 and S&P 500.

As you might guess, I come up with a pretty limited list when I apply the screen to the S&P 500 - only 10 stocks. Some are well known, some not so much. Kinda Semiconductor/Electronics/Software heavy. I'm envisioning a set of core holdings based on the S&P 500, but prefer to have a slightly bigger universe to pick from. Media dividend growth is 20% (excluding Coach, don't know what they did). Even when applied against all except micro caps, I get 13 stocks.

So, my questions for the folks on the forum is this: What adjustments would you make to my criteria, both in terms of actual criteria, and the value of the given criteria?

Thanks in advance!

[Kerim]

Great post and great questions, Ok Red! (And you got an audible laugh out of me with "Royal Baby"!)

Just out of curiosity, what are the 13 stocks that your screen gave?

Without doing any analysis, I'd say that if you want to adjust your screen in a way that gives you a bigger universe of stocks to start investigating further, you're going to have to relax either your earnings growth criteria, your dividend growth criteria, or both. 8 percent and 10 percent on those, respectively, eliminate a ton of excellent DG stocks.

I might also eliminate the debt/equity parameter altogether and see what happens. It is certainly an important number, and you definitely want to understand the debt and balance sheet situation before investing, but perhaps it is too restrictive on the initial screen. Lots of companies with excellent cash flow have increased debt load substantially in the low rate environment of the past few years. So high debt could be a disqualifying warning sign, but it could also just be a very prudent and rational reaction to the interest rate environment. For example, I doubt PM would pass that screening metric because of high debt, but I give them a pass for it because I think it was a good move by management.

That said, I do not personally use a formal screen as my first step in looking for good dividend growth investments. My *first* step is almost entirely informal -- I essentially crowdsource the initial screening process. I read a lot of articles and comments, I scan David Fish's CCC lists, and I look at the favorite dividend stock lists of some of the other writers that I respect.

When I see a name repeated frequently and it catches my interest, or when someone with some credibility recommends a name, I'll give it a five-minute review. That is, I'll pull it up and see if it has a streak of raising the dividend going, I'll scan earnings, yield, and payout ratio and the such. Many companies do not survive even this cursory review.

But for the ones that do, if I see a potentially compelling story, I'll add the company to my watch list and do a much deeper dive into the numbers and the business, creating a separate spreadsheet for the company showing all of the metrics I'm interested in. (You can read all about my entry criteria philosophy here.) I actually score and rank the stocks using a very rudimentary scoring system that I made up. Finally, if a stock looks good to me and looks like it could be a good addition to my portfolio, I'll start reading all I can about it to see if I believe the story is good and the future promising.

I guess then that my approach feels more haphazard than starting with a screen. A screen can be a great way to find good candidates. But I've always found them too limiting. There are just so many great stocks that fall short on one metric -- very few stocks are firing on all cylinders at the same time. (And the ones that are may then fail the p/e metric because people are buying it up!)

Finally, I'd add that after spending a bunch of time in the dividend growth world, I've come to realize that the universe of stable, reliable dividend payers and growers just isn't all that large. You'd never need to know more than 50 to 100 names, and a large percentage of them are names you are already familiar with. The others you come across just by hanging out in the DG world.

Sorry if I've gotten off topic from your specific question, and I hope this hasn't come across as preachy. Hope to help in any way I can!

[Ok Red]

Kerim, thanks for the reply and the explanation of your approach!

Crowdsourcing is an interesting methodology. I read Seeking Alpha on a regular basis and it's a bit to overwhelming to me, which is why I sought out a discussion board specifically tied to DGI! So, in a way, this board is my crowdsourcing...

Ratings system? So you have an algorithm. Hmmm. It will take me a bit to figure out how I would weight different factors but it would be cool to come up with. I'm sure that is what dividend.com is hawking, but I've done some algorithmic development before and it would be fun to try to put something rudimentary together

Here are the 10 from the S&P 500. There are a couple of familiar names, and some that I've seen listed on this board:

AFLAC
Blackrock Inc
CA Inc
Cummins Inc
Coach Inc
Intel
KLA-Tencor Corp
Qualcomm
TE Connectivity Ltd
Union Pacific Corp

Three techish companies makes me a bit nervous about diversificatioin. So I think that as I study more I will figure out the good ones and start averaging into those positions. For instance, Union Pacific and AFLAC seem pretty solid. Maybe Cummings and Intel. The rest I don't know. Coach makes me nervous with it's 100% fiver year dividend increase.

If you expand it to all excluding microcaps, these 5 are added:

Agrium Inc
HollyFrontier Corp
Potash Corporation of Saskatchewan Inc
RPC Inc
Yamana Gold Inc

Interesting group, not sure that I'd make the leap into any of these until I spent some time doing research.

Thanks again for the reply!

[Kerim]

Interesting. The only names on those lists that I'm familiar with are Aflac and Intel. I'd happily be a buyer of AFL at today's prices, and would buy some, I think, if I had more cash to deploy at the moment. I hold a lot of INTC in my portfolio, but it is in a bit of a prolonged transition period right now and it is unclear if and when they are going to get earnings moving in the right direction again. And they've gone five quarters without a dividend raise. The price is down, so could be a good time to initiate a position, but only if you believe they'll get the ship righted and only if you can stomach the risk.

That type of story about INTC is the type of thing that a screen can't provide, and it is an important component of picking stocks that you can hold for decades. Honestly, I'd be a little uneasy using that list as your starting universe of stocks to build your dividend growth portfolio. You didn't exactly say that you were going to do that, but in any case I'd encourage you to expand your starting universe of stocks such that it includes some of the staple dividend growth names, like JNJ, PG, CLX, MO, WAG, KO, T, MCD, WFC, and the such. They may not hit all of the parameters of your screen, but they all have managed to raise earnings and dividends through good times and bad over the decades. They have sustainable business models and sell products that people buy over and over again. They have brands that masses of consumers know, love, and trust.

I don't mean to suggest that the stocks on that list are bad -- again, I am not so familiar with most of them. Mostly it just seems to me like a pretty narrow list to build a dividend growth portfolio out of.

Looking forward to hearing your further thoughts and plans.

[EricL]

I think your screen is overall pretty good, I think the 1.5 max PEG could be a bit restrictive, 2.0 would show you a lot more companies, many of which are solid dividend growth companies.

For example, a company trading at a reasonable 17 PE with a 10% growth rate is a 1.7 PEG. Some examples that I own like this would be BAX, CMI, TGT, PM, MMM and WMT.

From your list I own AFL, CMI, COH, QCOM and UNP. I sold out of my INTC a couple weeks ago after they announced disappointing earnings and failed to raise the dividend. Of those 5 that I own from your screen, I would probably rank them AFL>UNP>CMI>QCOM>COH.

[Ok Red]

Thanks for the insights!

Well, it's pretty clear that the screening was... precise, yet imprecise. So I tried a different approach.

Since my time horizon is shorter, I decided that my primary screen will be equities that have sustained high dividend growth rates. I downloaded the Dividend Champions, Contenders and Challengers spreadsheet from the DRIP website and simply looked at dividend growth rates over 1/3/5/10 year periods for all CCC to identify my potential purchases.

Wow. This was an englightening exercise. My criteria of 20% DGR (ish) over 10 years quickly whittled the list down to a manageable size. I picked out five 'no brainers', verified the fundementals on schwab and initiated small positions. I will average in over time. The five? Well, no new news here:

CMI
UNP
TGT
WAG
LOW

I prefer to have a concentrated portfolio, but not THAT concentrated. I'm thinking that I can manage to keep up with 10-20 positions (I also have a broad spectrum of wisdom tree etfs to cover emerging and intl markets, plus I hold individual issue bonds).

I'm still doing research on a few more, mostly those who have been paying dividends for a shorter time period like ACN, V, COH, DV, MSFT, NATI, SWY and WSM.

There are also some companies that I have little knowledge of, such as TJX, TXN, SU, SEIC, EGLD, RTN, JW-A, GK, DCI CHD, and AEL.

And there are some well known companies whose dividend 10 year dividend growth meets my criteria, or at least comes close, but whose recent increases have tailed off, like AFL, MCD, CHRW, ITW and INTC.

In all those cases, I will need to simply do the research and figure out which ones appear to be able to sustain the requisite dividend growth.

It is definitely a different way to build a portfolio, which is why my original screen as too limiting - I was trying to apply a bottoms up approach and it was not valid for the portfolio construct.

[TomK]

Well done -- and way to take the bull by the horns! Looks like you've timed TGT on a nice dip today.

Tom

[EricL]

Ok Red,

I am long CMI, UNP, TGT and WAG from your list so obviously wishing you the best of luck with your purchases!

Here is an article that may interest you regarding Wisdom Tree ETF's, although it looks like you are using them for purposes other than dividend investing.

http://seekingalpha.com/article/1638952-...etfs-doing

[Ok Red]

Thanks for the encouragement

TomK, one of my personal joys from starting DGI is that I no longer have to worry as much about the current value of my portfolio. As long as the dividends keep growing I'll be good to go. However, I am well aware that I am investing at or near a market high, and in VERY uncertain times, and that investing on a dip may simply be investing at the start of a down or bear market. That is why I'm averaging in. I will most likely increase my core holdings each month... or maybe even each quarter... until I reach my target allocation. In the meantime I gotta do the research on those other equities so that I can expand the port.

EricL, that article was precisely why I starting looking into DGI! And yes, my international and emerging markets positions are for diversification purposes, so I will keep them. Once I've built up my domestic equities I will dump those ETFs as they're too dilute and too expensive.

[Horace Cugle]

I was fooling around with a dividend calculator the other day, just looking at a few of my stocks and making some projections. I'm sure there are much more comprehensive calculators out there but this one serves the purpose.

http://www.buyupside.com/calculators/div...ulator.php

I tried to be reasonable with the DG rates, no need to kid myself with ridiculous unattainable numbers. Long term projections are always iffy because you have to make a few assumptions and they may not play out. Still it's kinda fun to play "what if" with a few of your stocks

I used a $10k investment in each stock, the current yield and the last dividend raise as the growth rate, no new money, just a straight reinvest buy and hold. The calculator also assumes the stocks were in an IRA/401K, ie, no money coming out, no taxes. I looked at the annual income figures for 5, 10 and 20 years out.

I lowered WAG's DGR to 12% but that is still too high for a 20 yr projection but might be OK for 10 years out. CVX and KMI might be a little high too. T, SO and LEG DGR's should be able to be maintained. Anyway you can plug in your own numbers and assumptions and get your own picture of what the annual dividends might be.

T 5.25% yield, 2.3% DGR 5yr-$730, 10 yr-$1,103, 20 yr-$2,806

XOM 2.88% yield, 10.5% DGR 5yr-$549, 10yr -$1,202, 20yr-$10,785

MO 5.60% yield, 9.1% DGR 5yr-$1,134, 10yr-$2,872, 20yr-$43,627

SO 4.81% yield, 3.6% DGR 5yr-$704. 10yr-$1,130, 20yr $3,477

CVX 3.35% yield, 11.1% DGR 5yr-$673, 10yr-$1,604, 20yr -$94,211

WAG 2.58% yield, 12% DGR 5yr-$521, 10yr-$1,215, 20yr-$13,958

LEG 4.04% yield, 3.6% DGR, 5yr-$567, 10yr-$860, 20yr-$2,274

KMI 4.30% yield, 10% DGR, 5yr-$857, 10yr-$2072, 20yr-$27,363


The first thing that jumped out at me is why in the hell would anybody with 10-20 years left until retirement even "sniff" at stocks like T, SO and LEG? If the stocks with the big 20 year pay outs did even half of their projections they still CRUSH stocks like T, SO and LEG.

A more reasonable/generic way of looking at it......

$10K, 5.0% yield, 3% DGR, 5yr-$715, 10yr-$1,117, 20yr-$3,153
$10K, 3.0% yield, 8% DGR, 5yr-$509, 10yr-$962, 20yr-$5,082
$10K, 2.5% yield, 10% DGR, 5yr-$457, 10yr-$802, 20 yr-$$6460

Investors with many years until they need the dividend income might want to put a lot more weight on dividend growth than current yield. High current yields are nice for people that spend the income, but they won't do the guy with time on his side much good simply because it's a now or later proposition, ie, when do you want "more money" to occur?

Now I'm not saying this is the holy grail or to go all in on the concept, but when you think about it, wouldn't a 30 year old investor have to be nuts to own T in an IRA?

Of course there's many more things to consider when screening stocks, but depending on your time horizon the right combination of yield and DG can make a big difference.

[Ok Red]

Good point, Horace. However, I think that everyone has an individual goal in terms of the combination of yield and DGR. For instance, I'm 54, and my time horizon is 10 or so years, but I have really good cash flow so I don't really have to be worried about income for a while. As a result, my portfolio yield is only 2.73% but the DGR over the last 3 years (excluding one holding which doesn't have a 3 year history yet) is 23%. However, there may well be folks younger than I who prefer a higher current payout just based on individual preferences. It's all about what trips yer trigger

[Horace Cugle]

Hey OK Red, are you from OK? I have spent a lot of time in Norman and OKC and absolutely loved the place.

I got on this topic when I went through our portfolios with a fine tooth comb and discovered that, with regards to when and how much a dividend stock will pay out, some of them were in the wrong portfolios. And a few didn't belong in either.

Since rising future income is what dividend growth is all about, it made sense to consider which "type" of dividend stocks have the best chance to produce greater income at a particular time.

Of course there's as many investing styles as there are investors, I'm just trying to develop something I have been overlooking; another investing criteria. It's not just a "how much" thing it's a "how much and WHEN" thing.

You've chosen to be in higher DG rates that makes perfect sense because you want your income to peak later, and it's exactly what I'm getting at.

For a young investor holding stocks like T, SO long term doesn't do what TGT, WAG type stocks will do. Why would a young investor pass on a chance for massive future income for high current income, when he can't use high current income because it's in an IRA?

The only things I can think of is the volatility caused by the uncertainties that come with faster growing stocks. He pays too much attention to the short term prices and eventually seeks out high yield to so he can feel like he's getting somewhere. Losing patience. That definitely describes me at times.

By the same token, a retired guy who wants max income today wouldn't be especially interested in WAG or TGT type stocks. If he is satisfied with a 5% yield and 3% DG to cover inflation, stocks like T and SO do that. And they can probably do it forever; cruise control.

T and SO type stocks are losing to to WAG and TGT type stocks after 10 years and the income from them explodes from there.

What I think is really interesting in a psychological sort of way is high yield for the retired guy seems a very logical/sensible/intuitive choice, but lower yield high DGR for younger guys, not so. I think because we are always drawn to higher current yield and want it.

All of this suggests that there is a Dividend Yield/Dividend Growth/Time curve we should be on.