Sunday, April 27, 2014

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.
  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.
  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.
  6. PEG Ratio less than 1224 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.
  7. No monthly dividend ADR stocks1 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
Consumer Staples
Information Technology 
 Telecommunication Services 
Health Care 


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? 


  1. Nice Post! I particularly liked that you evaluated your portfolio and determined which sectors your are current underweight and/or overweight and identified the exactly what you need to do to balance your portfolio. Having your plan detailed is half the work...good luck with your goal!

    1. Thanks FFJ! I've been looking at various ways of assessing DivGro and approaches to diversifying it. The thing is, I'm only buying one or two stocks per month, now, so it is important for me to consider candidates carefully and at the same time think about improving portfolio diversity.

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

    Keep them on your watch list for possible purchases down the road when the numbers look better. Those are the kind of companies I personally want to base my retirement on. I don't know, I guess having been through the great recession the sleep well at night factor is very important to me. Just my opinion of course.

    0 telecoms? I'm sure some Canadians will fit your numbers. Pretty sure RCI and TU would. You won't find Telus (TU) on the CCC lists because it started an American ADR just a couple years ago. It has a 9 soon to be 10 year streak in Canadian Dollars however. Anyways Chowder uses a relaxed number for utilities and telecoms. Chowder himself bought T for the Project 3 Million Portfolio just last month...

    Something to think about. Take care!

    1. Thanks for stopping by, CI, and for your great comments. I'm aware of Chowder's relaxed approach for utilities and telecoms. And, I'm not seriously suggesting that it is a good idea not to own any telecoms -- I do own two and have no plans of getting rid of them.

      As far as T is concerned, I've looked at it but the CAGR is just not there. In fact, the Chowder number for T is 7.6 right now, which is lower than the relaxed 8 for Telecoms... I do own T in another (income) portfolio, so I'm not against T -- just not as a dividend growth stock.

      Also, I appreciate your point about non-CCC stocks that would fit the numbers. I'm sure there are many out there. For me, it is very important to have a consistent source of financial data and the CCC list certainly provides that! Most of my analyses are done formulaically and, with a full-time career in an unrelated industry keeping me quite busy, I think I'll stick to using the CCC list exclusively.

      Having said that, please don't hesitate to continue to suggest candidates!

    2. I made a mistake deleting one telecom stock too many (along with four other faulty deletions). The change makes the target for telecom stock 1, not 0 anymore...

  3. Nice list. I like your initial screening process. I typically won't buy stocks yielding below 2% but I do have exceptions, V for instance. I do like a combination of higher yield and slower growth with lower yield and higher growth. I think a nice diversified mix of dividend growth stocks produces consistent dividend growth. I place a lot of emphasis on the 5-year CAGR. This plus the starting yield is a good indication of future growth. I don't use the Chowder rule religiously but have a modified approach to calculate a 10-year YOC. I like how everything has their own methods for screens but DG investors still end up with very similar purchases.

    Take care!

    1. Hi AAI -- for some reason I missed your comment. I agree that a good mix of higher yield/slower growth and lower yield/higher growth stocks would make up a more balanced portfolio, especially for younger investors with a lot of time on their side. Personally, I lean slightly towards higher yield/slower growth stocks, as my time is more limited.



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