All About Interest

One man's journey to financial independence.

September 2014 CCC Rankings

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

**Changes – This is the second month that I 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 34, 49 and 56 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 54 candidates left that may be worthy to do further research on:
Champions09_14_CCC_Champions

  

Contenders09_14_CCC_Contenders

 

Challengers09_14_CCC_Challengers

On the Champions list, there are no new companies but many were eliminated.  MO is still on the list and I just recently picked up another 100 shares.  

 

There was just one new name on the Contender’s list, TEVA.  TEVA has been on before.  TEVA is still a full position for me, it’s up over 35% since buying shares in the high 30’s.  I really like the generics market and they are the largest player.  There were also several companies removed from the list.

 

The Challenger’s list added a couple new companies including NRIM and SAFT.

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. I saw you plan to have 25% International stocks in your portfolio. Do you do the same screening process with foreign stocks ? I’m french and, unlike US stocks, it’s very hard to find good informations on european stocks (payout ratio, dividend growth rate, etc). It would be nice to have a European CCC List 🙂 . There’s a good screener here http://www.devenir-rentier.fr/bourse_actions/europe/actions_sp_europe_350_dividend_aristocrats.htm but not with all these infos (Europe 350 Dividend Aristocrats = stocks from S&P Europe 350 that have increased their annual dividends 10 or more consecutive years).

    And why don’t you take international stocks in its country of origin, example (with bloomberg ticker): BHP:AU or BLT:LN instead of BBL:US , for currency diversification.

    For REIT, you could do the same screening process with AFFO instead of P/E (but you have only OHI in your portfolio).

    There’s an article today on seekingalpha about yield on cost. Some says that only current yield matters. http://seekingalpha.com/article/2470375-yield-on-cost-a-vitally-important-consideration-for-retired-investors.

    • CaptainTrips,

      Yes, I am targeting 25% and am currently around 27% international companies. Not to mention, most of the large U.S. companies I own still earn a lot of their profits overseas.

      A European CCC list would be great. It is a little more difficult to find all of the same data. My brokerage firms do give me the same data for the international companies that I invest in like BBL, UL and BP to name a few.

      Thanks for that link! I just added it to my resources and I’ll check it out in more detail later on.

      I’m not too concerned about minor fluctuations in currency. I buy on U.S. exchanges for simplicity so I don’t need to open up another brokerage account. Most of the companies I’ve bought are based in countries like the UK that have treaties with the U.S. so there is no foreign dividend tax withholding. That’s also why I bought BBL and UL over BHP and UN.

      I’m mentioned this before, but I purposely have limited REIT exposure. This is because I’m investing in real estate directly as rentals and feel I get plenty of exposure there.

      I saw that article on YOC. To me, YOC is nothing more than a “feel good” measure because it doesn’t take into account the time-frame. If I have a high YOC but low current yield, I might consider selling if I found shares overvalued and I could find a better replacement that provides more income. This doesn’t happen often though as I plan to hold most of my position long-term. Some could argue that I should sell WAG but I’ve learned to hold my winners and let them run as long as they are doing what I expect out of them.

      Thanks for stopping by!

  2. Good work here. Gives me some additional stocks to put in my shopping list.

    Btw after the ruling on BP do you plan to still hold or sell those. Looks like penalties could be huge.

    • Irwin,

      I’m glad you found some value in this. I like the screen but haven’t decided if I’ll continue it month or quarterly. It might depend on what the market is doing.

      Penalties are large but BP is a giant company. I am still confident they can provide a lot of value to shareholders over the long-term. The uncertainties are built into the stock price already and this is why they have a higher yield than their peers like CVX. I will certainly be keeping a closer eye on them now though. As long as they keep increasing earnings and dividends then I’m a holder.

      Cheers!

    • AG,

      MO has a great starter dividend and a history of strong growth. That’s a tough combination to find.

      Thanks for stopping by!

  4. As always, love this article every month.

    Right now I’d still be buying into the energy sector. OXY, COP, ESV, HP, NOV. Upstream O&G and drilling right, ancillary companies, etc. ESV didn’t make the list.

    At least another 6 months before I do any investing.

    I’m personally surprised if Cracker Barrel can sustain amazing growth. I’m not sure what their payout ratio is like, and I’ve never personally seen one so I don’t know much about it personally or what their competitive moat is like.

    Thanks,
    WE#1
    Wallet Engineer #1 recently posted…Buy The Good StuffMy Profile

    • Hi Wallet,

      I’m happy that you find some value in it. The energy sector seems to carry most of the value right now. My weight there is already large but I just keep thinking it will average out over time. OXY and HP are on my list. I haven’t done much research on NOV yet. ESV should be on the challenger list next year since 2014 is 5 years of raises. So that would likely put it on here.

      Yeah, I’ve been to a Cracker Barrel. The food is OK, but I don’t think I’d invest in the company. I’m not big into the restaurant stocks. I am looking at possibly adding Whole Foods here though.

      Cheers!

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