April is already more than half over, and I have yet to publish the update to this series. In the future, I hope to get this out a lot closer to the first of the month, as the prices and statistics are all based on prices from the last day of the previous month (in this case 31 March). So what does a few weeks matter in the long term if we’re looking for investments to hold for decades? The short answer is usually not a lot…the day to day action in the market and small differences in share prices won’t matter in the long run. On the other hand, larger swings in share prices can matter more.
Take for instance KO, which when I began working on this post was hovering around $38.50/share and a yield of 3.16%, but is now sitting at $40.7 and a yield of 3.00%. Bottom line, always do your in-depth research on these companies before thinking about investing, to include looking at more up to date pricing than you see here.
Due to a mostly sideways March, this list will look quite similar to the previous months edition…it takes more significant market action to push a larger number of stocks in or out of our top 25. Let’s take a look.
The Best Values – April 2014
To arrive at this top 25 list, we start with the latest Dividend Champions Spreadsheet, then perform the following screens (you can find the latest spreadsheet here: http://dripinvesting.org/tools/tools.asp at the “U.S. Dividend Champions” link):
- Cut negative 5 year Earnings Per Share (EPS) Growth
- Cut negative earnings / No P/E
- Cut yields below 2%. Over time, low yielding stocks could be good dividend investments, but they will need to maintain very high growth rates to compete with those in the 3-4% yield range. V is an example of a low yielding stock that is under 2%, but might be worth considering.
- Cut P/E’s over 20. This will eliminate many big names in dividend investing, but with a list so large, why not pick the best current values?
- Cut Chowder Rule under 12 and Tweed Factor below zero. These are combinations of yield, P/E, and 5 year Dividend Growth Rate (DGR). Stocks with the highest DGR and yield, with the lowest P/E will float to the top when sorted by these metrics.
We then sort out the MLPs, ADRs, and Small Cap and below stocks…they deserve special consideration…and a post of their own if I can find the time…for now we’ll stick with plain old companies, medium market cap (2 billion shares) and above.
Here is the “Top 25″ Chart with the best of the best:
This “bubble” chart shows three things: 10 yr DGR (vertical), yield (horizontal), and years of increasing dividends (bubble size- smallest is 5 years, largest is 46 years). How can there be only 5 years of consecutive increases on a chart with 10 year DGR? In those cases, the company either failed to increase or decreased the dividend sometime in the period 5-10 years ago, though the growth rate over the last 10 years still remains high enough to be competitive.
The simple explanation is that the farther to the top right corner of the chart, the higher you’re dividend return will be over time, and the larger the circle, the more confidant you can be that the company can weather tougher economic times while continuing to pay and increase dividends.
Whether or not you recognize the stock symbols, you probably know most of the companies here, and that’s a good thing…it’s much easier to invest in a business you understand than one that is foreign to you. WMT, TGT, MCD, AFL, MSFT, and IBM are well known businesses, and have some of the longest streaks of dividend increases out there. You probably recognize all of the largest bubbles with the exception of HP Helmerich & Payne (not Hewlett-Packard), which is an oil & gas company.
This chart suggests that many of the long standing dividend growing companies eventually fall in the 2-3% yield range and the 10-25% 10 year DGR mark (right there where many of the biggest bubbles are). It’s difficult to grow/pay more than that amount without growing the percentage of profits paid to dividends to eventual unhealthy levels. If you want higher dividend growth or yield, you are going to have to step further outside to companies with less of a track record, like CBRL, WEC, MAT, and DRI. MCD’s position on this chart is impressive given that it has been paying and growing dividends at such a high rate for 38 years.
Lets look at the data in more detail:
Note that the majority of the stocks here are not new this month, as a fairly even March held the list mostly consistent. Recall, the green are previous good values and the purple are previous good values that we own. Here are some other thoughts:
- There are 2 new companies on the top 25 list: GPS and PFG.
- 2 companies fell off the list since last month: HCC and UNP, both due to yields that were previously just above 2%, and fell below the 2% mark after upward price action.
- CCE is Coke’s independent bottler, marketer, and distributor in Western Europe. It doesn’t have the long track record of growth that KO does (7 years vs 52), but the DGRs are twice as high, as smaller companies can grow faster than larger ones. Seeing that KO is a bit overvalued currently (even more so after the recent 4% day), CCE may be the ticket.
- Two restaurants return from last month, remaining very high on the graph- CBRL and DRI (owns several restaurant chains). Their numbers are solid, though the restaurant industry, being a luxury industry and not one of necessity, will always be subject to more volatility than many of the other industries on this list. As a note: these companies are also some of the smallest on the top 25 list. In general, the smaller, the more room for growth, and also, the more risk.
- HP has recently increased its dividend up to nearly 3% from sub 1%, thus “artificially boosting its DGR to very high growth rates. It’s worth noting that while they have continuously increased dividends for 42 years, it was at a much lower yield than they currently pay.
- Most of the companies above are not in our portfolio, and that’s OK. For the most part, that means that the companies we bought have appreciated in price out of the “good buy” range, which is the whole point of buying low, isn’t it? : They will come back around into the buy range eventually, and we’ll be waiting. Until then, there are plenty of current good values.
Here are the stocks with 5 year DGR’s (but not enough history to calculate 10 yr):
The chart is not too helpful for this group, as most are in the same DGR range with the exception of WU, which is a standout. Higher yields in this group are currently only available in the tobacco industry, PM and LO, which are so similar that they almost overlap. Note the downward direction of DGR for LO and CMS as you go from 5yr to 3yr to 1yr – this is something to monitor over time, as it could be an indicator that longer term dividend growth is slowing. Overall, not really any notable changes from last month.
And here are two with only 5 years of dividend history, and a 3 yr DGR:
DPS remains on the 3yr DGR list and is joined by COH. COH is an intriguing stock, as it is not often that you see an apparel (and a luxury apparel company at that) company in the same conversation as the rest of these. That’s the beauty of this type of analysis- it’s not about preconceived notions of what a certain type of company should do, it’s all about what they have done in the past (and while this is no grantee of future performance, it is a good place to start your evaluation).
And finally, how are all the remainder of the “big names” in dividend investing doing (that didn’t make the cut)?
These stocks are sorted by Tweed Factor. Under the current sorting methodology, the stocks closer to the top are the closest to breaking into the top 25 list.
Plenty of big names here. We own more than half of them already, and I hope to buy the rest at good prices over the next few years. At that point, the process would switch from opening new stock positions to increasing the ones at the best current valuations. Some other thoughts:
- The # of years of dividend increases is astounding in this list (an average of 30 years). Though the combination of DGR, yield, and P/E may not be as favorable as those in the charts above, there is a lot of comfort in investing in a track record of performance such as these. Is it worth overpaying? That’s up to you.
- Some of these big names come in favorably under a P/E of 20, but fall short with lower DGR or yields. Examples are GIS and PEP. They are all close to being good values, which means you won’t be overpaying too much for them now.
- Some companies here due to low DGR across the board from 1 to 10 years: T, VZ, NWN, and LEG being examples of low growth.
- INTC falls out of the recommended list not due to financial data, but because at this point, you might as well wait and see what they do with the next dividend payment (should be announced mid-April). If the dividend is not increased from the current rate, the growth streak will be broken at 10 years.
I have a feeling that with April’s price action, we’ll see more differentiation between this month’s list and next months. I’ll do my best to get future posts in this series out closer to the 1st of the month, or at least in the first week.
Links to previous posts in the series: