All About Interest

One man's journey to financial independence.

August 2014 CCC Rankings

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ncf_power_ranking_b3_576.jpgIt’s time for another addition of my CCC rankings by 10-year YOC.

**Changes – I’ve now changed the P/E cap to 20 from 18.  I’m hoping that some higher growth stocks will now show up.

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 20.  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 32, 53 and 57 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 8, 18 and 39 respectively.

My Results
Here are the 44 candidates left that may be worthy to do further research on:

Champions08_14_CCC_Champions

  

Contenders08_14_CCC_Contenders

 

Challengers08_14_CCC_Challengers

On the Champions list, there were a few changes from the last list. First, TGT, MO, NC and AWR are on the list.  Actually TGT has a slightly higher P/E but I still included them because they have really good dividend growth and a nice starting yield.  MO is back on the last after one month off.  NC is still on the list but after NC’s latest increase in May of only 3%, this company won’t be on the list next year.   AWR is now on my list after I upped the p/e.  I’m actually considering a purchase in AWR soon.

 

There were a few new companies on the Contender’s list like CAT.  After CAT’s recent dividend raise they are back on the list.  I also included a couple companies that are close to making the list, DE and GIS.  DE increased their dividend fairly recently by 18% and I mentioned that here.

 

The Challenger’s list added a few new companies including UNP due to me allowing a larger P/E.  I also included SNP and BCE since they weren’t too far off.


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

  1. As always, I love this article every month. I just want to eat them all up. Kind of makes me want to get a Motif account and buy a motif of challengers (and or contenders, champions).
    Wallet Engineer #1 recently posted…Rent vs. BuyMy Profile

    • Wallet,

      I’m glad you like these updates. I can’t always get them out on the 1st since they do take a little time to compile but I get them out as soon as I can. There are lots of great companies on the CCC sheets so I’m just trying to narrow it down a little.

      That’s actually a great idea. I could do a Motif for CCC medical companies or a general 30 position list from the challengers. The possibilities are endless.

      Thanks for stopping by!

    • AG,

      No problem, I’m glad you find them helpful. I am always looking for new ways to sort the CCC lists for ideas.

      Take care!

    • Hi Evan,

      I use the latest version of the sheet which has the updated P/E for the end of that month. That’s why I try and get these out as close to the 1st as I can since the price obviously influences the P/E. So no, I don’t do any further updating besides what’s on the CCC sheet.

      Thanks for stopping by!

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