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Tuesday, September 13, 2016

DivGro Pulse: September 2016

Today I'm starting a new monthly article series. My goal is to monitor DivGro's health as a dividend growth portfolio – taking the proverbial pulse to determine if there are areas of concern that require attention.

My monthly review articles will continue to present a summary of the past month's activities along with a snapshot of DivGro's current state, including metrics such as projected annual dividend income (PADI), average yield on cost (YoC), percentage payback and projected annual yield.

In contrast, the pulse articles will be strategy focused. I'll provide updated fair value estimates for each stock. Comparing a stock's current price to its fair value estimate will help inform investment decisions. I'll also provide various charts to visualize recent performance, including one plotting current price relative to the 52-week trading range.

I think it is good to be aware of a stock's recent performance. Looking at my portfolio spreadsheet, each stock's overall performance is clear. I have columns for profit/loss percentage and annualized profit/loss percentage. But a stock's overall performance can easily hide poor recent performance, especially for stocks that I've owned for a long time. Knowing when a stock performs poorly will help me to identify potential problems.

Another goal I have with these pulse articles is to clarify (and track) investment decisions. For example, there are some stocks in my portfolio that I want to sell if conditions are right. Clearly stating these plans and tracking the conditions would be very helpful.

Finally, I view my portfolio as consisting of different categories of stocks. For example, there are core stocks with strong earnings growth and average or above average yields. These typically have strong brand names and wide moats along with established track records of dividend growth. Other category include high yielding stocks, high growth stocks, monthly dividend stocks, safe dividend stocks and dividend funds.

As with many of the article series on my blog, the layout of this one will evolve over time. In fact, I won't be covering everything mentioned in the introduction this month. Rather, I'll be adding additional sections to future pulse articles.

Discounted Stocks

The following chart shows the percentage discount to fair value of all the stocks in my portfolio. Green bars represent discounts and red bars represent premiums (or negative discounts):

Stocks trading at a discount of 10% or more are candidates for further investment. Here are the candidate stocks along with their latest 7-star ratings:

Gilead Sciences, Inc (GILD)
 discount 27.9%• ★★★★★★ 
AbbVie Inc (ABBV)
 discount 25.8%• ★★★★★☆☆ 
Apple Inc (AAPL)
 discount 13.9%• ★★★★★★ 
Valero Energy Corporation (VLO)
 discount 13.1%• ★★★★★★ 
Qualcomm Inc (QCOM)
 discount 12.3%• ★★★★★★ 
Wells Fargo & Company (WFC)
 discount 11.6%• ★★★★★★ 
Target Corporation (TGT)
 discount 11.4%• ★★★★★★ 
Ford Motor Company (F)
 discount 11.2%• ★★★★★☆☆ 
T. Rowe Price Group Inc (TROW)
 discount 10.2%• ★★★★★★ 

Of these candidates, I wouldn't mind adding shares to my WFC and TGT positions. So far, I've allocated less than 1% of available capital to these stocks, compared with an average allocation of 1.89%.

Top Rated Stocks

Sometimes it is appropriate to add shares to an existing position even at or slightly below fair value. Seeking Alpha contributor Chowder advocates buying shares of a great dividend growth stock that continues to experience higher earnings expectations. He calls the strategy dollar-cost averaging up.

Here are the top rated stocks in DivGro (all rated 7-stars) along with their discounts to fair value:

The Walt Disney Company (DIS)
 discount   6.2%• ★★★★★★★ 
General Dynamics Corporation (GD)
 discount   3.0%• ★★★★★★★ 
3M Company (MMM)
 premium 17.2%• ★★★★★★★ 
Nike Inc (NKE)
 premium   2.3%• ★★★★★★★ 
The Travelers Companies, Inc (TRV)
 discount    0.8%• ★★★★★★★ 
Wal-Mart Stores, Inc (WMT)
 premium   6.0%• ★★★★★★★ 

The premium on MMM shares is too high for my taste. Of the remaining top rated stocks, I've allocated less than 1% of available capital to GD, NKE and TRV so far. All three stocks made my 10 Dividend Growth Stocks for September 2016 list, with GD being the top ranked stock. GD is my top performing stock with an annualized total return of 39%. GD is also DivGro's first home run stock.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to its 52-week trading range:

Stocks trading below the 50% mark are experiencing a downturn and potentially are undervalued. 

Note that the magnitude of the trading range is obscured because I'm expressing the current price as a percentage of the 52-week trading range.

Certainly, GILD has performed badly over the past 52 weeks, underperforming the S&P 500 by about 40%:

My average cost basis of $94.49 is indicated in the chart.

Earlier this year I created a few charts to help me evaluate the performance of stocks in my portfolio. One chart identifies poor recent performers by plotting the performance difference between one-year and annualized total returns. These charts covered only my long-term positions.

Here, I'll repeat the exercise using only the stock price (and excluding dividends). This approach allows me to evaluate all stocks in my portfolio regardless of holding period. It is also simpler to create as the only inputs are current and historical stock prices.

The chart confirms that GILD has been the worst performer over the past year, this time compared with its own annualized performance over 5 years. 

Investment Ideas

I'm deferring the classification of my stocks into different categories until next month. There is some research that I need to do first, but it would be interesting to hear from readers which stocks you consider to be core dividend growth stocks!

Meanwhile, based on the above, I'm considering adding shares to the following DivGro positions:

 • GD – top rated stock; ranked #1 in September's top 10 list; small discount to fair value
 • NKE – top rated stock available at small premium to fair value
 • TRV – top rated stock trading at fair value; relatively consistent growth over past 5 years
 • WFC – discounted by nearly 12% to fair value; trading near 52-week lows
 • TGT – available at discount of about 11% and trading near 52-week lows

Additionally, readers may want to look at DIS, AAPL, VLO and QCOMM. 

Finally, here is the list of stocks I want to sell:

• BBL – ranked 3 stars; waiting for smaller loss; will consider selling by year's end to offset capital gains
• HP – ranked 4 stars; will sell at breakeven or by year's end to offset capital gains
• PNNT – ranked 2 stars; plan to hold and collect double digit yield until dividend is cut

That's it for my first DivGro pulse article! Thanks for reading and take care everybody!

Do you have a set of dividend growth stocks that you consider to be core holdings? If so, please share the list below in the comments! 


  1. Replies
    1. Its hard to describe in detail, but here's a high level description: I primarily use a multi-stage dividend discount model (DDM) analysis with a target constant growth rate of 3% after 10 years. I use an estimate of the 5-year DGR to project dividends for the first 5 years, then adjust to reach the 3% target DGR between years 6-10. I use 3 different required rates of return centered around 10%. I also use the Gordon Growth Model with a 10% required rate of return. This gives me 4 different estimates for each stock.

      From here it gets somewhat complicated, but I derive the final fair value estimate by correlating each set of estimates (as well as some derivatives such as "average") to the current stock prices over a large set of estimates. Essentially, I pick the "best" estimate statistically. The trick is to use estimates for many stocks simultaneously.

      This is probably more detail than you needed :-)

    2. That's pretty reasonable. I'd quibble with 3% terminal growth rate as its greater than US GDP growth. Any US company that grows at 3% TGR eventually becomes larger than the entire economy. But pretty reasonable over 20 years or so.

    3. Fair enough, though spot checks of my fair value estimates against those of Morningstar,, and S&P Capital IQ give me confidence that I'm in the right ball park. Also, I usually look for discounts of at least 10% to fair value.

  2. Love this new series, FerdiS. I like these kind of reviews and pulse checkups -- taking a step back and taking a mile high view of things instead of the day to day noise and reevaluating the overall strategy.

    Some good ideas for new investments. Thanks for sharing

    1. Hi R2R -- thanks for your comment!

      I feel like I need to start doing more evaluating and less "trading". Dividend growth investing is a patience game. By looking at things more strategically, perhaps I'll make more strategic moves less frequently :-)


  3. Thanks Ferdi. Added to WFC and TRV in last couple of pull backs. Considering GD and TGT.

    1. Cool -- hope you do well on those trades! I haven't acted yet, but will do so soon.

      All the best and happy investing!

  4. Nice new graphs Ferdi!

    Theres finally some movement at the market.
    Great time to introduce this.

    Best wishes, DfS

    1. Thanks DfS -- I hope this will be helpful for my readers. I know I'll find it useful to revisit these graphs every month!


  5. Are you interested in CVS? It just fell below 90.
    Or BMY? Now around 55.

    Thanks, Jan.

    1. Hi Jan -- those look like interesting opportunities. For now, though, I'm looking to build the number of shares of existing positions so I can create more opportunities for options trading.

  6. Hi Ferdi. I really like this new informative series. Thanks for taking the time to pull these metrics together.

    1. Cool -- thanks Investment Hunting!

      I really hope this would be helpful! While I have a reasonable idea of what I'd like to do with this series, my no means do I have it all worked out in my head! The format and layout will certainly change over time. If you have any suggestions for things to try, let me know!

  7. Hi Ferdi, what do you like about TGT moving forward? I've thought about adding it as well to my portfolio

    1. Some reasons: 49 years of dividend increases, yield of 3.5%, 10-year DGR of 19.6%, payout ratio of 47%, P/E 13.35, trading about 12% below my fair value estimate.

      Best of luck!


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