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Saturday, January 10, 2015

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 Discretionary8313.6%
Consumer Staples447.2%
Energy508.1%
Financials17628.8%
Health Care304.9%
Industrials8513.9%
Information Technology386.2%
Materials426.9%
 Telecommunication Services 81.3%
Utilities559.0%

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:

SectorCount%HoldingsActionTarget
Consumer Discretionary289.44 no action 4
Consumer Staples279.13 add 1 4
Energy299.87 remove 3 4
Financials7725.97 add 3 10
Health Care7  2.42 no action 2
Industrials4515.24 add 2 6
Information Technology16  5.43 remove 1 2
Materials20  6.71 add 2 3
Telecommunication Services6  2.02 no action 2
Utilities4514.13 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!

10 comments:

  1. I like the idea of not removing stocks to balance out the portfolio. I do that too. Basically, because I don't like selling, ever. Although I did have to make a sale recently, but that wasn't for rebalancing purposes.

    I al so like your series of filters for choosing stocks (from a pre-filtered list). They seem really sensible, especially the yield sectin which takes into account the growth stage of the company. This kind of reminds me of dividend mantra's post on the three stages of the rocket ship or words to that effect.

    Thanks for your update,

    cheers

    ReplyDelete
    Replies
    1. Hi Theres Value -- thanks for commenting! I've been tinkering with those filters for a while, but I like where they are at now. They cut just more than half of the CCC list stocks. 297 stocks is still a lot to "keep watch over", but I apply some stricter filters when I do my "10 Dividend Growth Stocks" posts and it is that set of stocks that I analyze and consider as candidates for the month.

      Take care!

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  2. That makes sense, it seems like a great way to whittle down such a large list. Here in the UK, we have a smaller list of stocks to begin with. My own watch list starts with the FTSE 350, then it gets whittled down by around 8 criteria, including whether they have 7+ years of increasing dividends, are within 7-20 or 7-25 PE, and so on.

    ReplyDelete
    Replies
    1. Sounds great! Thanks for visiting!

      I haven't been to the UK for many years now. Maybe I'll come for the Rugby World Cup!

      Cheers
      FerdiS

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    2. you should totally do that! we could have our first international visitor to the UK PF bloggers meetup

      Delete
    3. :-) Maybe I will!

      Cheers
      FerdiS

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  3. What site do you use to quickly find prior year dividend growth? Divisend.com?

    ReplyDelete
    Replies
    1. Various sites. Dividend.com is one of them. I also use GuruFocus. Enter a ticker symbol and click on the Dividends tab. I often go to the investor site of the company -- most have a list of historical dividend payments.

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  4. Thanks for the great analysis of the market. I agree, I like financials this year, along with consumer staples and materials. I am however, adding to my energy stock positions because in my opinion the energy sector is on sale this year. As a long-term investor I am happy to have a low cost basis and weather the storm.

    ReplyDelete
    Replies
    1. Makes sense to be investing in energy stocks at deflated prices. Some suggest energy stocks will go down even more. But, at some point in the near future, the crude oil price will go up and energy stocks will follow. You'll be in a great position then!

      As for DivGro, I'm already overweight in Energy, so I feel that I'm in a good position, too...

      Delete

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