Financials Dominate my Watch List

Of all the pages on my blog, I change my Watch List page most frequently. The reason is my watch list of dividend growth stocks is dynamic and I update it at least once a month. The watch list contains all of DivGro's holdings, as well as a subset of David Fish's CCC stocks. It is organized by sector using GICS sector names.

Dividend growth stocks in the Financials sector dominate the CCC list and also my watch list. In the CCC list, there are 176 Financials sector stocks compared with only 8 Telecommunication Services sector stocks. For this reason, I prefer a proportional sector allocation. Every month, I calculate sector targets matching the proportional number of stocks of sectors in my watch list.

This year, I'm planning to increase the number of holdings in DivGro from 36 to 42. I'll continue to use my sector targets to bias new purchases to sectors that are under-represented. Furthermore, I plan to continue my monthly series of 10 Dividend Growth Stocks in which I rank candidates overall and by sector.

The CCC List

The most recent CCC list (12/31/14) contains 611 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 106 Champions. Contenders have increased their dividends for 10-24 straight years, while Challengers have increased their dividends for 5-9 straight years. There are 246 Contenders and 259 Challengers.

Following is a table listing the number of stocks in the CCC list by sector. Financial sector stocks dominate, while there are only 8 Telecommunication Services sector stocks:

Sector	Count	Proportion
Consumer Discretionary	83	13.6%
Consumer Staples	44	7.2%
Energy	50	8.1%
Financials	176	28.8%
Health Care	30	4.9%
Industrials	85	13.9%
Information Technology	38	6.2%
Materials	42	6.9%
Telecommunication Services	8	1.3%
Utilities	55	9.0%

Compiling my Watch List

Every month when the CCC list is updated, I apply a series of filters to trim the list. I've updated the criteria I use to favor Champions over Contenders and Contenders over Challengers. Also, I'm using a more forgiving version of the Chowder rule and have introduced an exception on my PEG Ratio criterion for REITs (Real Estate Investment Trusts).

Here is the series of filters I use to trim the CCC list:

1. Market Cap at least $250 million
   
   A threshold of $250 million seems reasonable and would include a few micro-cap stocks ($50 - $300 million).
   
   
2. Dividend Yield at least 2% for Challengers, 1.5% for Contenders, and 1.0% for Champions
   
   I prefer to buy stocks yielding at least 2.5%. To allow for yields that change quickly with the rise and fall of stock prices, I apply a more lenient yield filter which depends on the stock's track record of dividend increases.
   
   
3. Chowder Rule at least 8% (5% for Telecommunication Services and Utilities)
   
   The Chowder Rule considers the sum of dividend yield and 5-year compound annual growth rate (CAGR). For inclusion in my watch list, I use a more lenient version. Note that some CCC stocks have "n/a" in the Chowder Rule column of the spreadsheet, since they do not yet have 5-year CAGRs. For these stocks, I use 50% of the 3-year CAGR:
   
   
   dividend yield + (3-year CAGR) ÷ 2
   
   
4. Distribution Yield of MLPs at least 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
   
   Financial data for these stocks are often incomplete, making formulaic comparisons problematic. Also, the online brokerage I use for DivGro does not offer OTC or pink sheet trading.
   
   
6. PEG Ratio less than 12 (except for REITs)
   
   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, but I have a liberal threshold since P/E component of the PEG ratio varies significantly by industry or sector. The REIT exclusion is to retain some REITs that have "n/a" in the PEG Ratio column of the CCC spreadsheet.
   
   
7. No stocks being acquired
   
   One of my rejection criteria is if a company is being acquired or merging with another company. The CCC spreadsheet conveniently identifies such cases in the Note column.

Note that some of DivGro's holdings are no longer CCC stocks, such as Intel Corporation (NASDAQ:INTC). I add these to the list of stocks that pass the above-mentioned filters to form create the watch list.

New Sector Targets

This year, I'm planning on slowly increasing the number of holdings in DivGro to 42. I'll continue to consider sector diversity when making stock selections. As previously mentioned, I prefer a proportional sector allocation.

Following is this month's sector targets, which are proportional to the number of stocks in each sector for a desired total of 42 holdings:

Sector	Count	%	Holdings	Action	Target
Consumer Discretionary	28	9.4	4	no action	4
Consumer Staples	27	9.1	3	add 1	4
Energy	29	9.8	7	remove 3	4
Financials	77	25.9	7	add 3	10
Health Care	7	2.4	2	no action	2
Industrials	45	15.2	4	add 2	6
Information Technology	16	5.4	3	remove 1	2
Materials	20	6.7	1	add 2	3
Telecommunication Services	6	2.0	2	no action	2
Utilities	45	14.1	3	add 2	5
TOTALS:	297	100.00	36		42

Note that I have not intention of removing stocks from DivGro to match these targets. So, for the time-being, Energy and Information Technology will be overweight in my portfolio. I'll continue to update my watch list and sector targets every month when the CCC list is updated.

Thanks for reading!