All About Interest

One man's journey to financial independence.

July 2014 10-Year YOC CCC Rankings

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Happy holiday week to everyone!   It’s time for another addition of my CCC rankings by 10-year YOC.

Sorry I was busy last month and wasn’t able to get this update out in time.  With higher markets and some volatility, there have been some changes to the lists.

What I Did

I decided to take the CCC spreadsheet and rank the stocks based on their 10-year YOC.  If you are unfamiliar with what Yield-On-Cost is (YOC) then refer to my resources tab or see below for an example.  If you don’t know about David Fish’s Champion, Challenger and Contender (CCC) spreadsheet then you are doing yourself a disservice, the link is also on my resources tab.

Let’s say you purchased a stock at $10/share in 2013 that paid a 4% dividend or $0.40/share. In order to achieve a 10-year YOC of 10% that stock would need to pay out at least $1.00/share by 2023.

You may wonder why I care about a 10-year YOC instead of just the 1,3,5 and 10-year CAGR’s. The main factor that the CAGR leaves out is the starting dividend yield.  The starting dividend in combination with the dividend growth rate will greatly influence your returns.

There’s a variation of this screen used alot by members of the Seeking Alpha community and it’s coined the “Chowder Rule”.  This can also be found now on the CCC sheets.  The rule basically adds the starting yield with the dividend growth rate (5-year CAGR) and looks for it to be higher than a certain number.  While this can be a useful screen, there is still a discrepancy between dividend payers that have different growth rates but still arrive at the same number.  For instance, a 3% yielder with 5% growth would get the same grade (an 8) as a 5% yielder with 3% growth.  Holding a lower yielding stock with a higher growth rate will at some point provide higher returns assuming the growth rates don’t change.  My 10-year YOC would give this 3% and 5% yielder a 4.9 and 6.7 respectively.

Why I Did It

The purpose of this screening process will be to identify companies that have a high expected dividend growth rate combined with a starting yield that would produce greater returns. These companies may be good candidates for further research.

How I Did It

The first step was to sort all stocks by their current dividend yield and eliminate any stocks not paying at least a 2% yield.
Next I sorted all columns by TTM P/E and eliminated every stock with a TTM P/E over 18.  I do realize this eliminates a lot of REIT’s, MLP’s, and telecom stocks.  I’m ok with this since I’m not really targeting these stocks right now.  Then I decided to eliminate any Champions with a 10-Year CAGR < 5%, followed by any Contenders with a 5-Year CAGR < 7 % and finally any Challengers with a 3-year CAGR < 7%.  This screen eliminates a lot of slow growing companies like utilities.

This last screen dropped the list of Champions, Contenders and Challengers to 15(-1), 33(-18) and 38(-3) respectively.

Next I took the latest CCC sheet and added some new columns to calculate a 10-year YOC using each stock’s 1,3, 5 and 10-year compound annual growth rate (CAGR). I will call these new metrics 10YOC1, 10YOC3, 10YOC5, and 10YOC10 for simplicity.

After sorting, I looked for any companies that had a 10YOC1, 10YOC3, 10YOC5 or 10YOC10 of 10% or higher. I applied this to the list of Champions, Contenders and Challengers.
Next, I wanted to look to see if the DGR was increasing or decreasing. I highlighted in red the 10-year YOC’s of companies that were both reducing their rate of increases and still under 10%.
This is a previous example of how it looked:
Companies got credit for increasing their dividends at faster rates. For example: The 10YOC5 for AWR in the example above was 4.97 and did not get highlighted in red because its 10YOC5 was higher than its 10YOC10 of 4.09.
Next, I decided to remove any company that had a 10YOC1 in the red for Champions and a 10YOC1 or 10YOC3 in red for Contenders and Challengers.
For the Example Champions list above this removed LEG, MDT, NUE and WMT.
This new round of elimination dropped the list sizes for the Champions, Contenders and Challengers to 4(-1), 10(+1) and 30 (+4) respectively.
My Results
Here are the 44 candidates left that may be worthy to do further research on:

Champions07_14_CCC_Champions

 (click to enlarge)
 

Contenders07_14_CCC_Contenders

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Challengers07_14_CCC_Challengers

(click to enlarge)
On the Champions list, there were a few changes from the last list. First, CVX, FDO and MO did not make the list this time since their stock prices have increased.  We have a new company on the list, NC.   NC’s latest increase in May was only 3% so this company won’t be on the list next year.   With many solid companies pushing P/E’s well over 18, this list will continue to be small.
There were a few new companies on the Contender’s list like DE, LMT and WEC.  If you notice, I included DE since the CCC list hasn’t taken this year’s increase into account.  If you didn’t notice, DE increased their dividend by 18% and I mentioned that here.

The Challenger’s list added a few new companies.  Additional companies now include AVX, CCE and NOV to name a few.  I also left SNP on the list since they were close to making the cut.

I like this list as an additional watch list.  I know I posted recently a Watch list of 50 companies that I’m interested in owning at some point if the price is right.  It’s more of a static list that I’ll change as I see fit.  The thing is that I’m already around my target portfolio size of 40, so the majority of my purchases will be of existing positions.  I did add a 10-year YOC column based off the 5-year CAGR to my portfolio and watch list though.

Keep in mind that this is just a starting point and I feel these companies need further research before making an investment.You can find previous months by following my CCC Rankings label.
*photo courtesy of ESPN

Comments

    • Asset-Grinder,

      No problem. I’m glad you find these helpful. I think WMT looks really good here and they are also on my list. If I didn’t already have such a large position in TGT, I’d but adding them to my portfolio.

      Thanks for stopping by!

    • MDP,

      Sure, I’m just glad some people find it useful. I’m pretty sure MO was on this list a few months ago. I don’t think they are cheap but I think they can keep producing more income for a long time. With their SabMiller stake and getting into E-cigs, I think they can combat the lower demand for traditional cigarettes. Of course, they have no problem raising prices on them. I’m not too familiar with how BDC’s work but TCAP does look very interesting. They sure have a high dividend yield!

      You are killing it on your purchases! keep it up!

      Thanks for stopping by!

  3. I always love this article. Personally I set my P/E limit at 20 instead of 18, but it’s pretty arbitrary which still makes this information incredibly useful.

    I just bought LMT… not too much, but I wanted some diversification as I had no aerospace. I think it’s a pretty good choice, though.

    With the Eagle Ford Shale going nuts, I’m interested in stocks related to that. OXY for sure, I think NOV, COP not so much. Maybe HP…. not sure. Not on the list would be EOG, XOM, CHK, BP, and several more.

    Heard a lot about CPA in some finance magazines recently… I might consider dipping my toe into that.

    Also, for PM you could make the case that it shouldn’t be a challenger. It’s not a new company, but rather a spin-off. On the one hand it’s already an established company. On the other hand it seems like comparing apples to oranges because the pre-spin-off financials were not just PM financials. Thus… the further research comment.
    Wallet Engineer #1 recently posted…Personal Goals for the Remainder of 2014My Profile

    • Wallet,

      Setting the P/E at 20 would certainly add a lot more companies to this list. I might have to adjust my P/E in this market. I’ve added to a couple of companies with over 20 p/e ‘s already this year.

      Those are all solid energy companies that you mentioned. I own a decent size chunk of COP and BP. I was really close to buying OXY last year and the price popped. I haven’t given it another look but I should really do that. HP looks very interesting, and if I wasn’t already invested in another driller, ESV, I would have bought that one already.

      I don’t know anything about COPA so I’ll have to take a peek at that one.

      I completely agree with you on PM. However, I’m just going off of the CCC sheets. I think PM is still at a decent value right now. They pay a great dividend and I love the international exposure.

      Cheers!

    • Sandesh,

      I’m not sure why that doesn’t work now. Well if you’d like, you can right-click and save the picture as a file and then open it with whatever viewer you’d like so you can enlarge it.

      Take care!

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