My New Watch List of Dividend Growth Stocks

Of all the pages on my blog, I tinker with my Watch List page most. The list contains tickers of candidate dividend growth stocks, organized by sector. It is a subset of Dave Fish's CCC stocks (Dividend Champions, Contenders, and Challengers), plus a small selection of non-CCC dividend paying stocks.

My goal with this post is to reconstruct my watch list by using a similar approach to the one I use every month to identify 10 candidate stocks. Additionally, I want to figure out what sector-balanced really means. I don't think it means having the same number of stocks in each sector.

While sector diversity is a good goal, I don't want to be pedantic about it. Some sectors have a limited number of dividend growth stocks. Others have many great (even superior) dividend growth stocks.

Filtering CCC stocks

Starting with the CCC list of 519 stocks, I applied a series of filters to reduce the number of stocks to something more manageable:

1. Market Cap at least $250 million – 40 deleted (479 remain)
   
   Market capitalization in not one of my selection criteria, but this provides a quick way to reduce the number of stocks. A threshold of $250 million seems to be a reasonable cut-off.
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2. Dividend Yield at least 1.5% – 106 deleted (373 remain)
   
   I prefer dividend yields of at least 2.75%. There are some excellent dividend growth stocks with smaller yields, though. Also, yields change quickly with the rise and fall of the stock market, so a good-sized buffer is warranted.
   ~
3. Chowder Rule at least 10% – 127 deleted (246 remain)
   
   One of my selection criteria considers the sum of dividend yield and 5-year compound annual growth rate (CAGR), which is expected to exceed 12%. Filtering by 10% rather than 12% keeps more stocks in the list. Note that some CCC list stocks have "n/a" in the Chowder rule column, since they do not have 5-year CAGRs. Instead, I use half of the 3-year CAGR:
   
             dividend yield + (3-year CAGR) ÷ 2
   ~
4. Distribution Yield of MLPs at least 5% – 9 deleted (237 remain)
   
   As 'compensation' for having to deal with Schedule K-1's at tax time, I want a distribution yield of 6.5% for investing in master limited partnerships. As with #2 above, I'm allowing some leeway for changing yields.
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5. No over-the-counter (OTC) or pink sheet stocks – 8 deleted (229 remain)
   
   The data for these stocks in Dave Fish's CCC list are sparse, so formulaic comparisons and ranking assignments are problematic. Also, the online brokerage I use for DivGro does not offer OTC or pink sheet trading.
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6. PEG Ratio less than 12 – 24 deleted (205 remain)
   
   My selection criteria prefers a PEG ratio of 2 or less. However, the P/E component of the PEG ratio varies significantly depending on the industry or sector, so I have a liberal threshold.
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7. No monthly dividend ADR stocks – 1 deleted (204 remain)
   
   In March, I sold monthly dividend payer SJR because my online brokerage was charging a trading expense fee of about $2 for every dividend deposit. As far as I can tell, this fee is charged because SJR, as a foreign stock, trades on the NYSE as an American Depositary Receipt. If SJR paid dividends quarterly, the $2 fee would have been less objectionable.  

Some surprising names do not make the cut. Of the popular dividend growth stocks I wrote about in February, AT&T Inc. (T) gets deleted because it fails to pass the Chowder Rule filter (#3). Other popular dividend growth stocks, such as the ones I wrote about in a follow-up post, also do not make the new watch list:

         GPC, HCP, ITW, K, LEG, LOW, MMM, NSRGY, SYY, V, and VZ  

Six holdings of DivGro would not have made the new watch list, either, but I'm retaining them since I own them...

• ETP, NTT, and PNNT are no longer members of the CCC list (due to dividend cuts)
• PRE (failed #3), SNP (failed #4), and VNR (failed #6)

Sector Diversity

Turning to the issue of sector diversity, let's look at how the 204 stocks are distributed by sector and what an ideal target would be, considering I'm working towards owning 36 different stocks at the end of 2014:

Sector	Count	Target		Sector	Count	Target
Consumer Discretionary	32	5.65		Industrials	31	5.47
Consumer Staples	27	4.76		Information Technology	15	2.65
Energy	20	3.53		Materials	12	2.12
Financials	40	7.06		Telecommunication Services	3	0.53
Health Care	10	1.76		Utilities	14	2.47
	129				75

Given DivGro's current sector distribution, I'll need to take the following actions to improve sector diversity and to match the new watch list's distribution:

1. Consumer Discretionary :  add  4 stocks, total = 6
2. Consumer Staples :  add  3 stocks, total = 5
3. Energy :  remove  2 stocks, total = 4
4. Financials :  add  2 stocks, total = 7
5. Health Care : no action needed, total = 2
6. Industrials :  add  2 stocks, total = 5
7. Information Technology :  add  1 stock, total = 3
8. Materials :  add  1 stock, total = 2
9. Telecommunication Services :  remove  1 stock, total = 1
10. Utilities : no action needed, total = 2

Because of uneven rounding, the number of stocks above add up to 37 instead of 36. Eventually, I'll probably own more than 36 holdings in DivGro, anyway!

I have no intention of removing stocks from DivGro! For the time being, then, I'll be overweight in Energy and Telecommunication Services.  

Full Disclosure: Long ETP, NTT, PNNT, PRE, SNP, VNR

Thanks for reading! Feel free to comment on this post... Do you try to diversify across different sectors? If so, is your target an equal number of holdings per sector?