It’s been a while since I’ve done one of these and the market is up quite a lot so it will be interesting to see the outcome.
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 get started 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 “get started” tab. It’s important to know about yield no matter which kind of stocks you are trading, for example even if you’re working in the forex market you need to Learn how to trade properly, including all of the technical terminology, in order to make the most of your investment. Here’s an example of yield and its effects.
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. To me this is like adding apples to oranges. 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
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 12(-16), 41(-11) and 122(-10) 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.
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:
For the Example Champions list above this removed LEG, MDT, NUE and WMT.
My Results (since the results were so small I decided to not eliminate Champions & Contenders based on P/E ratios this month)
Champions
Contenders
On the Champions list, WOW, there’s only 2! Medtronic (MDT) and VFC Corp. This isn’t a surprise as retail stocks have done poorly as well as healthcare stocks after Trump took over. I do own MDT and have been thinking about adding to it. VFC stock also looks compelling.
Then there’s the Contender’s list with names like IBM and CVS which I own. I’ve added some CVS this year already. There’s also some other bank names I’m not too familiar with worthy of looking at.
The Challenger’s list is still large with all the financials and REITs. A lot of the banks have had 5 years since the Great Recession and are back on this list. I may have to add an additional screen soon for the challengers. There’s some solid companies on this list and if you find the right ones you will be handsomely rewarded. I’ve added some AMGN not too long ago. I’m not too familiar with the others besides CSCO and ABBV.
*photo courtesy of ESPN
Thanks for sharing your dividend investment research. Appreciate the clear methodology and will take a closer look at some of these shortlist ideas. Really like the yield on cost basis metric too.
Jay recently posted…Trend Following Trade Ideas for June 2017 (Part 4)
Hi Jay,
No problem, I’m happy you found it helpful. I like using this metric to screen for undervalued dividend payers. It’s a good place to start.
Cheers!
So what’s your next step?? Decide to get more RE? 🙂 Thanks for sharing!
Passive Income Dude
Hi Dan,
Indeed! I haven’t posted about it yet but I’ve closed the restaurant and am working on building some storage units on a lot I’m about to purchase. I’ll be sure and post an update about it soon.
It looks like you’ve been busy, 4 rental properties now. Very nice. I’m curious if you’ve ever had any problems with tenants, those houses look almost too nice to rent lol. Anyways, keep up the good work, I like the diversification you have.
Cheers!
Thank you for this great article and the ideas you give us for those we are just beginning.
I liked the idea of the YOC and I will see if the implement in my searches of companies.
Greetings and congratulations for the blog.
LuiMi,
I’m glad this was helpful for you. I wish you luck starting out.
Take care!
Love the yield on cost metric-it’s super useful for evaluating the overall growth of a portfolio I think.
Tom C. recently posted…The Basics of Currency Trading