Friday, September 12, 2014

My Dynamic Watch List

I maintain a watch list of dividend growth stocks that I update at least once a month, sometimes more frequently. It contains all of DivGro's holdings, as well as a subset of David Fish's CCC stocks. Currently, there are 183 stocks in the watch list. The watch list is organized by sector using GICS sector names.

I reference the watch list every month when compiling a dashboard of the best dividend growth stocks. September's dashboard has HP, XOM, and PMT in the top spots. I use the dashboard to compile a list of candidates, one per sector, for further research. Until DivGro is nicely diversified by sector, I'll continue to bias my purchases to sectors that are under-represented.

The CCC list contains more than 500 U.S.-listed dividend growth stocks with at least 5 years of consecutive dividend increases. Champions have a streak of 25 or more years of dividend increases. There are currently 107 Champions. Contenders have increased their dividends for 10-24 straight years, while Challengers have increased their dividends for 5-9 straight years. There are 239 Contenders and 207 Challengers.

Compiling the Watch List


Every month when the CCC list is updated, I apply a series of filters to trim the list. I use criteria that are more forgiving than my stock selection criteria. The reason is I don't demand 100% compliance with my stock selection criteria. Instead, I have a rating system (out of 7 possible stars) that takes into account how candidates measure up to each of the selection criteria.

Consider, for example, this criterium:
  • A streak of at least 5 years of dividend increases
In my rating system, I score Champions higher than Contenders, which score higher than Challengers. Similarly, high yielding companies score higher than medium and low yielding companies. In 6 of the 10 selection criteria, I have ways of scoring candidates based on the degree to which they comply.

Here is the series of filters I use to trim the CCC list:
  1. Market Cap at least $250 million

    Market capitalization is not one of my selection criteria, but provides a quick way to reduce the number of stocks. A threshold of $250 million seems reasonable and would include a few micro-cap stocks ($50 - $300 million).

  2. Dividend Yield at least 1.75%

    I prefer dividend yields of at least 2.75%. To allow for yields that change quickly with the rise and fall of the stock market, a good-sized buffer is warranted. Some excellent dividend growth stocks with smaller yields will be included with this more lenient filter.

  3. Chowder Rule at least 10%

    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.

  4. Distribution Yield of MLPs at least 5.5%

    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 flexibility for changing yields.

  5. No over-the-counter (OTC) or pink sheet stocks

    The online brokerage I use for DivGro does not offer OTC or pink sheet trading. Also, the data for these stocks are often incomplete, so formulaic comparisons and ranking assignments are problematic.

  6. PEG Ratio less than 8

    The price/earnings to growth (PEG) ratio is used to determine a stock's value while taking the company's earnings growth into account. I prefer 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 stocks

    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 quarterly dividends, the $2 fee would have been less objectionable.
I add DivGro's holdings to the stocks that pass these filters to form my watch list. Note that some of DivGro's holdings are no longer CCC stocks.

Sector Targets


One of my goals for 2014 is to increase the number of holdings in DivGro to 36, "balanced across all 10 sectors". Instead of dividing equally between sectors, I prefer a proportional division. Given a target of 36 holdings, I calculate a target per sector by matching the proportional number of stocks in each sector of the watch list:

SectorCountProportionHoldingsActionTarget
Consumer Discretionary265.112 add 3 5
Consumer Staples214.134 no action 4
Energy163.157 remove 4 3
Financials397.677 add 1 8
Health Care71.382 remove 1 1
Industrials295.704 add 2 6
Information Technology163.153 no action 3
Materials112.161 add 1 2
Telecommunication Services20.392 remove 1 1
Utilities163.152 add 1 3
TOTALS:
183
36.00
34

36

Note that, much like my watch list, the sector targets are dynamic. As the watch list changes, so do the sector targets. At a glance, I can see that DivGro currently is light in Consumer Discretionary sector stocks (and heavy in Energy sector stocks). It is also clear that I'll end up with more than 36 holdings if I add 8 stocks (as indicated in the the Action column) without selling any of DivGro's current holdings. To me, 36 is not a hard target and I'm happy to accommodate 36-42 holdings in DivGro.

I'll continue to update my watch list and sector targets every month when the CCC list is updated.

Full Disclosure: Long PMT, XOM

2 comments :

  1. I am a big fan of David Fish's CCC list, and do similar filtering metrics as well. The most important thing for folks to remember, in my opinion, is that is is purely a starting point. The list is static, so stale information should not be relied upon halfway or three-quarters of a way through a month. Due diligence is an understated step in the individual stock selection game. If you don't understand something, don't buy it.

    Presumably you will add another 6-8 positions over the next six months or so. At that point, will you be focused on expanding your existing positions by evaluating which is the "best buy" at a particular time, or will you start moving in and out of positions at all?

    ReplyDelete
    Replies
    1. Yes, the CCC list is purely a starting point and investors should understand that it is updated only once a month. Price data will become stale after the next trading day, as would any data directly dependent on the stock price (such as yield). Other data (DGR, for example) change less frequently than monthly, so I wouldn't necessarily call those "static" or "stale". Either way, the fact that the CCC list is reliably updated every month is very valuable to me.

      As far as adding positions, I think at the end of 2014 DivGro should be sufficiently diversified (by sector). Rather than only adding new holdings, I'll consider adding to existing holdings where appropriate. I'm not sure yet if I'll stick to the $2,500 chunk size buys, though. I'm not planning on selling positions unless a dividend cut occurs. Also, I'm not sure yet how I'll handle dividend freezes. INTC, for example...

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