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:

Sector	Count	Proportion	Holdings	Action	Target
Consumer Discretionary	26	5.11	2	add 3	5
Consumer Staples	21	4.13	4	no action	4
Energy	16	3.15	7	remove 4	3
Financials	39	7.67	7	add 1	8
Health Care	7	1.38	2	remove 1	1
Industrials	29	5.70	4	add 2	6
Information Technology	16	3.15	3	no action	3
Materials	11	2.16	1	add 1	2
Telecommunication Services	2	0.39	2	remove 1	1
Utilities	16	3.15	2	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