All About Interest

One man's journey to financial independence.

November 2014 CCC Rankings

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

*I wasn’t able to get this out last month but was anxious to see what changes we might have now.

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 23(-11), 54(+5) and 63(+7) 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 5(-3), 24(+6) and 41(+2) respectively.

 

My Results
Here are the 70(+5) candidates left that may be worthy to do further research on:
 If any of the below images are too small, right click and open in a new tab.  
Champions10_14_CCC_Champions

  

Contenders10_14_CCC_Contenders

 

Challengers10_14_CCC_Challengers

On the Champions list, three companies were eleminated, well four if you count XOM which I includes since they were close.  ORI scraped by since they do have a 10-year YOC of over 10 and the rate of increases has stayed the same.  I don’t know anything about that company though.  I already own CVX on the list.  I was looking at HP at one time but ended up with another driller ,ESV.  I’m looking at WMT but have a high investment in TGT already so I’m good there.

 

There were a few new names on the Contender’s list.  I also left a few companies on that I highlighted in red since they were close to making it.  Those names included DE , GIS and BBL which I already own.  There’s several Oil & Gas names that may be worthy of checking out further.

 

The Challenger’s list is fairly large at 41 names.  CMI is a company I’d like to add at some point.  A lot of these names will make up the future Contender’s and Champion’s lists.

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

    • AG,

      I’d be loading up on Energy stocks if I wasn’t already a little heavy there. I agree with you, oil has to come back up at some point.

      Take care!

  2. I don’t have much hope for the oil giants concerning their decreasing earnings. The costs to develop gas and oil fields are rising each year, while new discoveries are fewer and smaller. Wouldn’t want to have them in my portfolio 20 years down the road.

    • Hi Klaus,

      The costs do go up but as the price of oil goes back up , the profits will be higher. I’m pretty comfortable with the large energy companies for the next 10-20 years. I think we’ll see a lot of growth from natural gas in the U.S. Anything could happen though and that’s why I will continue to monitor them.

      Thanks for dropping by!

  4. Hi, All About Interest.
    I’ve been reading both your blog & Dividend Mantra’s blog for a number of years and I’ve finally decided to make the jump into the blogosphere pool. I’m still brainstorming what the blog will look like, but I’ve got the general framework posted and in place. Thanks for doing what you do.

    Goosemann Jones
    Flight to Dividends Blog

    • Goosemann,

      I’m happy to have you as a reader of my blog. I think it’s awesome that you took the step to create your own blog. I’ll definitely stop by and check it out.

      I wish you continued success!

  5. AAI,

    I do not have much experience with that metric. Why would you use the YOC on an equity you never purchased. Just because the YOC was higher than expected over the past 10 years it doesn’t indicate anything about future growth. For example, what if that growth was done at the expense of large amounts of debt and the P/B is all out of whack?
    Evan recently posted…A Small Reminder about the Benefits of Dollar Cost AveragingMy Profile

    • Hi Evan,

      It’s just a way to measure and set a benchmark. I agree that YOC by itself doesn’t provide much useful information. However, I’m combining it with DGR which does provide a good indication of future growth based on the past. The 10yoc5 metric takes into account the starting yield of the security. So two companies that have the same DGR but a different starting yield would be valued differently. A 4% yielder that has a 5-year CAGR of 10% ranks much higher than a company that has the same 5-year CAGR but a starting yield of only 2%.

      I’m also not saying this is the only metric I use. Debt is also an important factor to look at. This is just one screen I like to use before doing some further research.

      Thanks for stopping by!

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