This year, I'm shifting focus to balancing my portfolio holdings across all 10 sectors in my watch list. Given DivGro's current sector distribution, I need to stay clear of candidates in Financials and Energy, in favor of candidates in the other sectors. If I stick to my plan of making a recurring monthly deposit of $2,500, I can expand DivGro's number of holdings from 24 to 36 (assuming I continue to buy stocks in $2,500 chunks).
Though I won't be a slave to diversifying exactly equally across all sectors, perhaps the aforementioned 12 purchases could happen like this:
| Sector | Count | Target | Sector | Count | Target | |
| Consumer Discretionary |
2
|
3
| Industrials |
3
|
3
|
|
| Consumer Staples |
1
|
3
| Information Technology |
2
|
3
|
|
| Energy |
6
|
6
| Materials |
1
|
3
|
|
| Financials |
5
|
6
| Telecommunication Services |
2
|
3
|
|
| Health Care |
1
|
3
| Utilities |
1
|
3
|
|
15
|
21
|
9
|
15
|
With the goal of balancing DivGro across sectors, I'm modifying the way I identify candidates. Starting with Dave Fish's CCC list, a spreadsheet providing financial data of 476 companies with 5 or more consecutive years of dividend increases, I apply a series of filters to reduce the number of stocks to a more manageable 30 candidates:
- Sort list by Dividend Yield y; delete rows with y < 2%
- Sort list by Chowder Rule c; delete rows with c < 9%
- Sort list by Sector
- For each Sector sublist, sort by increasing PEG Ratio and color-code the top 5 stocks
- For each Sector sublist, sort by increasing TTM P/E and color-code the top 5 stocks
- Resort entire list by decreasing Dividend Yield
- Delete all rows but for the top 3 color-coded stocks per sector (ignoring holdings in DivGro)
Trimming the CCC list by applying a series of filters is a great way to find candidate stocks matching your favorite criteria. I've been inspired by All About Interest, who uses a similar approach to create his 10-year yield-on-cost rankings.
With a more manageable list of 30 stocks, I proceed to score each stock based on my selection criteria and assign a star rating to each stock, out of a maximum of 7 stars. I then compile a dashboard sorted by star rating.
The following stocks are the sector winners for January:
| Meredith Corp. (MDP) • rank 1 | (*******) | Consumer Discretionary |
| PennyMac Mortgage Investment Trust (PMT) • rank 2 | (*******) | Financials |
| Altria Group Inc. (MO) • rank 4 | (*******) | Consumer Staples |
| Norfolk Southern Corp. (NSC) • rank 5 | (*******) | Industrials |
| Accenture Plc (ACN) • rank 9 | (*******) | Information Technology |
| Johnson & Johnson (JNJ) • rank 10 | (*******) | Health Care |
| Air Products & Chem. (APD) • rank 11 | (*******) | Materials |
| Alliance Resource Partners LP (ARLP) • rank 12 | (*******) | Energy |
| BCE Inc. (BCE) • rank 20 | (*******) | Telecommunication Services |
| CMS Energy Corp. (CMS) • rank 25 | (*******) | Utilities |
Please note that these stocks are candidates for further analysis, not recommendations.
• Meredith Corporation (MDP) | growth 20 yrs | yield 3.15% @ $50.00 | 5-yr CAGR 13.64%
Founded in 1902 and headquartered in Des Moines, Iowa, MDP is a media and marketing company serving American women. The stock trades at an 8 percent discount to my fair value estimate of $53.98. MDP appears to be an attractive stock for investors seeking both growth and income.
• PennyMac Mortgage Investment Trust (PMT) | growth 5 yrs | yield 10.28% @ $23.24 | 5-yr CAGR 21.80%
PMT is a real estate investment trust (REIT) operating as a specialty finance company investing primarily in residential mortgage loans and mortgage-related assets. The company's objective is to provide risk-adjusted returns to investors over the long-term, primarily through dividends. PMT carries more risk than other REITs due to exposure to both interest rate and credit risk.
• Altria Group Inc (MO) | growth 45 yrs | yield 5.00% @ $37.26 | 5-yr CAGR 9.21%
MO, through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine. It consistently returns value to shareholders, through dividends and share buy backs. My fair value estimate is $38.25. MO was founded in 1919 and has headquarters in Richmond, Virginia.
• Norfolk Southern Corp. (NSC) | growth 12 yrs | yield 2.24% @ $91.59 | 5-yr CAGR 10.83%
Based in Norfolk, Virginia, NSC is engaged in the rail transportation of raw material, intermediate products and finished goods, primarily in the USA. The company performs consistently, with strong free cash flow providing ample scope for paying dividends and repurchasing shares. My fair value estimate is $92.00.
• Accenture Plc (ACN) | growth 9 yrs | yield 2.26% @ $83.20 | 5-yr CAGR 28.33%
ACN is a global management consulting, technology services and outsourcing organization with headquarters in New York. The company operates in 54 countries and generated $28.6b in net revenues in 2013. It recently announced a 15% increase in its semi-annual dividend. It trades at about my fair value.
• Johnson & Johnson (JNJ) | growth 51 yrs | yield 2.88% @ $94.74 | 5-yr CAGR 7.61%
JNJ is a holding company based in New Brunswick, New Jersey, operating worldwide through more than 275 subsidiaries. The company is engaged in the development, manufacturing and marketing of pharmaceutical, medical, and consumer-related healthcare products. My fair value estimate is $89.20.
• Air Products & Chem. (APD) | growth 31 yrs | yield 2.54% @ $109.63 | 5-yr CAGR 10.26%
Founded in 1940, APD is a worldwide provider of industrial gases and a variety of polymer and performance chemicals as well as processing equipment. It is headquartered in Allentown, Pennsylvania. It trades at about my fair value.
• Alliance Resource Partners LP (ARLP) | growth 11 yrs | yield 6.10% @ $75.30 | 5-yr CAGR 12.53%
ARLP is a master limited partnership (MLP) engaged in the production and marketing of coal primarily to utilities and industrial users in the United States. It was founded in 1971 and is headquartered in Tulsa, Oklahoma. It trades at a discount of about %10 to my fair value estimate.
• BCE Inc. (BCE) | growth 5 yrs | yield 5.27% @ $42.32 | 5-yr CAGR 25.59%
BCE is Canada's largest communications service provider and serves as the holding company
for Bell Canada. The company provides wireless, data communications, telephone, high-speed Internet, direct-to-home satellite television and voice over IP services. My fair value estimate for BCE is $44.00.
• CMS Energy Corp. (CMS) | growth 7 yrs | yield 3.81% @ $27.11 | 5-yr CAGR 23.16%
CMS is holding company based in Jackson, Michigan. Subsidiaries of CMS are engaged in the generation in Michigan. It trades at a 7% premium to my fair value estimate of $25.26.
With enough cash for one purchase, I'll be buying shares in one of these candidates soon. To increase DivGro's sector diversification, I'd probably look at MDP, MO, and JNJ first.
Thanks for reading!
Thanks for the list - there are some names on there that I'll have to explore further. I'd be interested in reading a more detailed write up of your fair value analysis of JNJ. In a couple of days I'll be posting my fair value analysis of JNJ here and it's a bit higher than yours is so I'm just curios about your inputs/process. Thanks!
ReplyDeleteYou're welcome, mrc, and thanks for stopping by!
DeleteI'm quite new to the fair value analysis scene, so take it for what its worth... I'll probably write a post about my approach sometime this year, but here's a summary: I use a two-stage, decaying dividend growth model to estimate fair value. For the first stage, I use 5 years of estimated dividends provided in the CCC list. For the second stage, also 5 years, I decay the last available estimated growth rate (from years 4 to 5) to a target constant growth rate of 3% (for years 11+). My required rate of return is 12%.
Before this post, I just used the median of 3 fair value estimates from online sources and the Graham number estimate. Now I've added my own to the mix.
Let me know if any of this is unclear, or if you have further questions about my approach. As I'm still learning, I'd also welcome suggestions and pointers.
enjoyed the post. I add a few to my watch list.
ReplyDeleteCool! Let me know if you decide to buy any of these...
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