To start off this months post, I’d like to start by presenting a Year To Date chart (from Google Finance) of the S&P 500 (Large Cap), Wilshire 4500 (Small Cap), and MSCI EAFE (International Stocks). When looking at the broader market this year, we can split the action up into 5 parts:
- January decline
- February recovery
- March – late May sideways action
- Late May – Early July rally
- July – August decline
In contrast to the popular “sell in may and go away” saying, investors were rewarded for staying in the market through June this summer, though those gains have been eroded by recent downward action July and early August. The last weeks action shows an upward trend, but will it continue into September, or will we see another decline before the typically strong months of Oct, Nov, and Dec? You can see from the chart above how much better the Large Cap stocks (TSP C Fund) are doing than the Small Caps (S Fund) and Internationals (I fund). The action since July has shown much more of a downside to the Small and International stocks, with no more upside than the large caps have, thus they are leading by a fair margin.
When investing in individual stocks for the long term (10, 20, 30 years or more), the above action is not as important as you may think, as long as the long term (think decades) trend is up. Sure, you could taper off your purchases after an extended multi-year rally as we are currently experiencing now, holding cash for “better prices.” Or you could realize that you’re probably not a great fortune teller and that the best way to success in the market is through steady contributions into the best businesses out there…the ones better at making profit, and increasing it, year after year. It may be true that the market as a whole is overvalued, but for the long-term investor, there is plenty of value to be had out there today.
Changes to the Series
As always, we will be starting with the list of dividend champions, contenders, and challengers, and try to highlight the ones with the best apparent valuation right now. There are a few changes to the post this month. First, I’ve grouped the stocks in similar fashion to the CCC list where all of the data comes from, the three groups being:
- Champions – 25 Years or more of annual dividend growth
- Contenders – 10-24 Years or more of annual dividend growth
- Challengers – 5-9 Years or more of annual dividend growth
Stocks with less than 5 years of annual dividend growth may be worth investing in (and in fact I already have invested in a few), but will not be included in this series. I’m not sure why I didn’t do this before, I think it makes more sense. Second, I have replaced the Tweed Factor and Chowder Rule with a “TI Ranking,” which is nothing more than an adjusted Tweed Ratio which factors in all four displayed values of Dividend Growth Rate rather than just the 5yr rate. The calculation is:
Yield + Average (1,3,5,10 year DGR) – Earnings Per Share
This ranking will see some tweaks over the months and years (or however long I think this series is worthwhile) to try and capture a good quick comparative ranking of stocks without needing to get into too much detail to slow the process down. Third, I will include all stocks listed as “good buys” and “waits” in one chart from here on out, with a line separating the buys and waits. Placement of this line is subject to your investing style and goals…you may want to place it higher or lower than I do. Regardless of where the line is, the intent of the charts is to show the best statistical investments at the top and the lesser ones near the bottom (I say lesser because every single one of these is in the top few % of stocks on the market, all ALL likely represent good long term investments). The stocks at the top of the list show higher dividend growth and higher earnings per price you pay for the stock than all others.
(25 years or more of annual dividend growth)
- As before, purple indicates stocks that we own in our Roth IRA. We recently added KMB and GIS after pullbacks below their 200-day Moving Average as seen below for KMB. History shows that these stocks don’t stay below their 200-day MA for very long before recovering, so it seemed like an opportune time to buy. Blue stocks were previous “waits” for one reason or another, but that distinction is getting eliminated as it changes every month, and I don’t know how helpful it was anyway. You can see how many previous “waits” not appear near the top of the chart.
- HP remains on the top of the list due to their recent large dividend increases. This trend will not continue for ever, and will level off at a more realistic growth rate within the next few years, likely. I’m still trying to work out how to better place them in the chart.
- Keep an eye on the MR% Inc (most recent dividend increase %). If it is much lower than the 1 yr and 3 yr DGR (Dividend Growth Rate), that that stock will need a big increase next time to maintain their growth rates. Example: WMT, CLX, and KMB all had recent increases much lower than anticipated. Look for the next increase to be than much higher than average, or it may be a sign that growth is slowing.
- This month the black line appears between PEP and KO, representing the “best buys” above and “not as good of a buy(s)” below. There really is no magic to the placement of the line…as the differences between the stocks is small. Stocks below the black line are ones I would wait for better entry points on, for the most part, and ones above are in consideration to be bought today.
(10-24 years or more of annual dividend growth)
- Lots of good companies with fantastic DGRs here: many near the top of the chart have 10 year growth rates in the 20-30% range. How many other places in life are you going to increase your income by 20-30% over 10 years?
- As with the Champions above, stocks with Yields below 2%, P/E higher than 24, and DGRs below 6% have been cut from the list. These stocks represent the best of the best here.
- The black line appears near the bottom, as I couldn’t find a worthy discriminator that showed a good break point, aside from the bottom three being slightly overvalued for the growth rates that you are getting. The others appear to be good long term buys right now.
- Take a look at the Yield and DGR columns. This chart shows that they are not exclusive all the time. In fact, you can see that we currently own 3 companies near the top of the list that demonstrate both high yield 3%+ and high DGRs. You don’t always have to sacrifice yields (often times around 2%) for higher growth rates.
(5-9 years or more of annual dividend growth)
Challengers are companies that are (relatively) new to the dividend growth world. As such, they are often smaller, newer companies with more room for growth, but also more room for failure to continue that growth. It would be wise to fill your portfolio with companies from the above two groups (champions and contenders) and sprinkle in a few higher risk investments from this group. You can see that we have done that very thing with DPS, CCE, and SDRL from this group. Each has some thing unique going for it that made it a worthy purchase over one of the champions or contenders from the same industry:
- DPS and CCE represent investments in the soda/beverage industry, but at higher growth rates (dividend and stock price) than KO and PEP.
- SDRL is a high yielding stock (more than 10% at the time of our purchase) that also show high dividend growth. This combination is not available in the largest oil/gas companies (XOM, COP, CVX, BP, RDS.B (which we own already anyway)).
Remember, the less you know about a company (and the less of a track record of dividend growth), the more research you need to do before buying. If a new investor told me they hadn’t done too much research, but were thinking about investing in XOM, JNJ, WMT, and KO, I’d probably say “that sounds like a very solid plan.” These are some of the largest companies in the world with many decades of proven earnings and dividend growth- pretty safe investments wouldn’t you say? On the other hand, if they said they were thinking about investing in CPA, FAF, and CPA becuase they have fantastic DGRs, I would caution them to make sure they understood the companies, how they make money, and how they plan to increase profits for decades to come.
Looking to the Future
So far this (tax) year, we’ve invested in 8 companies. You can see the details of our purchases on the Portfolio page. In the coming months, I’ll be looking to commit $5,500 to our second Roth IRA before the end of the year. Purchases will either be in $1,000 increments for new stocks, or $500 increments to supplement existing positions. The goal is to target $1,000 positions in 30-40 companies before we begin to grow existing positions in earnest.
With only $5,500 allowed per year and so many quality companies out there, deciding which companies to invest in will not be easy. Then again, if we follow what the numbers above are telling us, we should be giving ourselves the best possible chance for good outcomes, and solid long term investments.
Until next time.