This is one of my favorite screen to do! I’m sorry I haven’t had time to do one of these in a while. I know many of you thought it was useful so I’m going to try to start these again. Instead of combining the Champions, Contenders and Challengers, I plan to break it up into 3 articles.
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. The CCC list is now managed by Seeking Alpha author Justin Law.
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. 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 ranking 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 1% yield.
Next I sorted all columns by TTM P/E and eliminated every stock with a TTM P/E over 30. 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. We are also late in the bull cycle and I want to focus a little more on value.
Then I decided to eliminate any Contenders with a 5-Year CAGR < 10%. This screen eliminates a lot of slow growing companies like utilities.
I’ve added a new screen, PEG, that is PE/Growth. I didn’t apply this to Champions but on my Contenders and Challengers list I eliminated any Dividend Contenders with a PEG ratio greater than 2 and any Challengers with a PEG ratio greater than 1.5.
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.
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 2(-6), 13(-6) and 48(-37) respectively.
I’m currently in the market for an industrial to add to my list. There’s a few here I don’t know much about. Air Lease Corp. (AL) has an amazing 7 years streak with dividend raises averaging no less than 30%. At this rate, you’d have a YOC in 10 years approaching 30%.
I’ll also look at Valero energy. I didn’t realize the large dividend increases they are having plus they start with a juicy 4.2% yield.
According to the numbers, Citizens Financial Group (CFG), had a 53% increase to its dividend yielding nearly 4% now. Their EPS payout ratio is only 37%. I’ll definitely be looking at these guys, there are some branches in my area so I’m slightly familiar with them.
Guys, these are the future Contenders and Champions here. If you pick the right ones you could see amazing returns. The more years to retirement, the more of these faster growing companies you should be looking at.
All of these companies have a 5+ year dividend increase streak which can be seen on the “Yrs” column.
I’ve sorted the list with highest yield at the top so you see some energy companies at the top.
Are any of these companies on your buy list?