Monday, May 28, 2018

DivGro Pulse: May 2018

DivGro Pulse is a series of articles that focuses on the strategy of dividend growth (DG) investing. My objectives are to reduce the risk, increase the diversification, and improve the balance of my portfolio holdings.

In my monthly pulse articles, I monitor the health of my portfolio of dividend growth stocks. These articles are strategy-focused and my goals are to reduce the risk, increase the diversification, and improve the balance of my portfolio holdings.

I update the fair value estimates for every stock in my portfolio and use the information to identify undervalued stocks suitable for further investment. As for overvalued stocks and depending on circumstances, I may choose between holding or selling them.

Earlier, I introduced Yield Channel Charts as a tool for dividend growth investors to assess market valuation relative to historical yield patterns. Yield channels are safety zones for stock prices. As long as the stock price remains in the yield channel, the stock can be considered fairly valued. But if the stock price moves outside the yield channel, appropriate action should be taken.

If the stock price moves outside the yield channel to the downside, the yield is high, historically, and the stock is undervalued. Buying more shares may be appropriate. Conversely, if the stock price moves outside the yield channel to the upside, the yield is low and the stock becomes overvalued. Selling the stock and replacing it with an undervalued stock may be appropriate.


In last month's edition, I looked at yield channel charts for Walgreens Boots Alliance (WBA) and Snap-on (SNA).

Based on WBA's 5-year yield history, the stock's undervalued yield is 2.53%. Given the slope of the undervalued yield line, I can project buy-below prices for the next few months:


Last Friday, WBA closed at $63.53 per share. This is below May's buy-below price, so WBA is trading at a 5-year undervalued yield. I think it is a good time to add to my WBA position.

As for SNA, the stock's 5-year undervalued yield of 2.14% implies a buy-below price of $153.27. Last Friday, SNA closed at $151.23 per share, so the stock is still trading at undervalued levels relative to its 5-year dividend yield history.

For various reasons, I'm not interested in opening a position in SNA at this time.

Quality Stocks

To estimate fair value, I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. My final fair value estimates also consider fair value estimates and price targets available elsewhere, such as from Morningstar, Simply Wall St, and TipRanks.

A byproduct of the evaluation process is a 7-star rating and a score that I use to rank the dividend growth stocks in my portfolio.

Here are the top ten ranked dividend growth stocks in my DivGro portfolio for May 18:

Lowes's (LOW) • Premium  2.89%  • rank   #1 •  ✭✭✭✭✭✭✭
Comcast (CMCSA) • Discount23.26%  • rank   #2 •  ✭✭✭✭✭✭✭
T. Rowe Price (TROW) • Premium  7.49%  • rank   #3 •  ✭✭✭✭✭✭✩
Texas Instruments (TXN) • Premium  5.94%  • rank   #4 •  ✭✭✭✭✭✭✩
General Dynamics (GD) • Discount  1.88%  • rank   #5 •  ✭✭✭✭✭✭✩
Cummins (CMI) • Discount12.12%  • rank   #6 •  ✭✭✭✭✭✭✩
CVS Health (CVS) • Discount29.44%  • rank   #7 •  ✭✭✭✭✭✭✩
Walgreens Boots Alliance (WBA) • Discount18.47%  • rank   #8 •  ✭✭✭✭✭✭✩
Hormel Foods (HRL) • Discount  1.50%  • rank   #9 •  ✭✭✭✭✭✭✩
Unitedhealth (UNH) • Premium  1.48%  • rank #10 •  ✭✭✭✭✭✭✩

This month, two stocks earned 7-star ratings, while the other top 10 ranked stocks each earned 6-star ratings. Generally, I consider stocks rated 5-stars or better worthy of further consideration.

Four stocks are trading at least 10% below my fair value estimates.

CVS Health (CVS) is trading about 21% below its 52-week high, but I'm not interested in adding to my CVS position at this stage. The company indicated that it would not be increasing its dividend in the foreseeable future.

I added Comcast (CMCSA) to DivGro in March, buying 150 shares at $33.60 per share for an initial yield on cost of 2.26%. The stock is trading below $32 now, so adding a few more shares would lower my cost basis.

I already mentioned that WBA is trading at undervalued yield levels, so it is good to see the stock in the top 10 and trading at a significant discount to fair value.

Finally, although Cummins (CMI) looks interesting, I think the stock may present a better opportunity in the next few months. So I'll probably look at the stock's yield channel chart in a future pulse article.

Discounted Stocks

I prefer to buy stocks when they're available at discounts of at least 10%. Here are the top ten discounted dividend growth stocks in my portfolio:

CVS Health (CVS) • Discount29.44%  • rank   #7 •  ✭✭✭✭✭✭✩
AT&T (T) • Discount25.64%  • rank #33 •  ✭✭✭✭✭✩✩
Comcast (CMCSA) • Discount23.26%  • rank   #2 •  ✭✭✭✭✭✭✭
Altria (MO) • Discount21.36%  • rank #21 •  ✭✭✭✭✭✭✩
Dominion Resources (D) • Discount20.93%  • rank #40 •  ✭✭✭✭✩✩✩
Walgreens Boots Alliance (WBA) • Discount18.47%  • rank   #8 •  ✭✭✭✭✭✭✩
Verizon Communications (VZ) • Discount17.45%  • rank #37 •  ✭✭✭✭✩✩✩
Hannon Armstrong Sustainable Infrastructure (HASI) • Discount16.54%  • rank #47 •  ✭✭✩✩✩✩✩
International Business Machines (IBM) • Discount13.45%  • rank #15 •  ✭✭✭✭✭✭✩
Omega Healthcare Investors (OHI) • Discount12.52%  • rank #48 •  ✭✭✩✩✩✩✩

All ten of the top discounted stocks are discounted by at least 10%, but only six of them have 5-star ratings.

I already mentioned CVS, CMCSA, and WBI.

AT&T (T) now yields a very attractive 6.15%. In May, I added 30 shares at $32.23 per share, increasing my holding to 230 shares. The average cost basis of my T position is $33.05, while the average yield on cost is 6.05%.

I looked at the yield channel chart of Altria (MO) in the March edition of DivGro Pulse. Given the stock's 5-year undervalued yield of 5.49%, I want to see the stock price below $51 before I'll consider adding more shares. 

International Business Machines (IBM) is one of my smaller holdings and I don't anticipate adding more shares in the foreseeable future. I would like to see the stock deliver consistent earnings growth before I'll consider adding more shares. 

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

Last month, 26 dividend growth stocks traded at a discount to fair value, versus 31 stocks this month.

Position Sizes

I like to look at the relative size of positions in my portfolio because stocks that are underweight are good candidates for further investment. While I prefer to see a more balanced portfolio, I sell covered calls on select dividend growth stocks. To do so, I need to own 100 shares or multiples of 100 shares, so several positions are larger than those not involved in covered call trading.

I consider positions with weights less than 1% as underweight positions and therefore good candidates for further investment. In the chart above, the underweight positions are shaded light green.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to its 52-week trading range. I color stocks trading below the 50% level orange. These are stocks with poor recent performance.

Microsoft (MSFT), Apple (AAPL), and T. Rowe Price (TROW) are all trading near their respective 52-week highs. In contrast, Johnson & Johnson (JNJ), Altria (MO), and Dominion Resources (D) are trading near their respective 52-week lows.

Another way to look at recent performance is to compare recent returns to annualized returns over a longer time frame. The following chart compares 1-year returns to annualized 5-year returns:

Please note that the returns exclude dividends.

Three stocks stand out in this chart, Valero Energy (VLO), T. Rowe Price (TROW), and Abbvie (ABBV). These stocks have performed exceptionally well in the past year compared to their annualized 5-year performances. On the other hand, Altria (MO), Comcast (CMCSA), and Hannon Armstrong Sustainable Infrastructure Capital (HASI) have performed rather poorly in the last year.

The reason I consider recent performance is two-fold. Stocks like VLO, TROW, and ABBV may be significantly overvalued, presenting an opportunity to trim or even close the positions. Conversely, stocks like MO, CMCSA, and HASI may be undervalued or troubled and I'd like to be alerted about it. That way, I can dig deeper to understand the reasons for the share price decline.

Positions to Boost?

I want to revisit CMCSA, particularly because adding more shares will lower my cost basis.

CMCSA is a Dividend Challenger with a track record of 11 years of higher dividend payments. The stock yields 2.39% at $31.75 per share and has a 5-year dividend growth rate of 14.9%. My fair value estimate is $41.37 per share, so the stock is trading at a discount of about 23% to fair value.

At 0.83% of total portfolio value, CMCSA is a relatively small position. The stock is ranked #2 this month and earned a 7-star rating. In the past year, CMCSA has performed poorly compared to its annualized performance over the past five years. In fact, it is the second-worst performer among my dividend growth stocks in this regard. Additionally, the stock is trading only about 10% above its 52-week low.

Let's consider CMCSA's yield channel chart to see if the stock is trading at undervalued yield levels:

The chart covers a 9-year timeframe and includes an overlay of the 5-year undervalued yield as a dotted line. The chart shows a (9-year) undervalued yield of 2.37% and a 5-year undervalued yield of 2.26%. I consider these levels strong buy and buy levels, respectively.

Since CMCSA is yielding 2.39%, the stock is a strong buy relative to historical yield patterns.

I'll probably look to add at least 50 shares to my current position of 150 shares.

Positions to Trim?

I look for scenarios where trimming or even closing positions can be done beneficially. Freeing up capital and redeploying it at higher yields, is one reason I look to trim positions. Others are reducing the overall risk profile of my portfolio and rebalancing my portfolio holdings.

This month, I want to look at Nike (NKE), the well-known maker of athletic footwear and accessories. The stock is up 37% in the past year and is trading within 2% from its 52-week high.

NKE is a Dividend Challenger with a track record of 16 years of higher dividend payments. The stock yields 1.11% at $72.25 per share and has a 5-year dividend growth rate of 13.9%. My fair value estimate is $62.15 per share, so the stock is trading at a premium of about 16% to fair value.

The stock is ranked #13 this month and earned a 6-star rating.

Let's consider NKE's yield channel chart to see if the stock is trading at overvalued yield levels:

The chart covers a 9-year timeframe and shows an overvalued yield of 0.95%.

With NKE yielding 1.11%, the stock is not yet trading at a level where I would consider trimming or closing my position.

Given NKE's annualized dividend of 80¢ per share, the stock would need to trade above $84 before it becomes overvalued based on historical yield patterns. So, I'm happy to hold my NKE shares for the time being.

New Positions?

My latest top ten list of dividend growth stocks contains two stocks that I don't own. I found these stocks using a new screener that simplifies the process of trimming David Fish's CCC list. To read about the new screener and to see the top ten dividend growth stocks for May, please read the article!

Here, I want to focus on one of those stocks I found with the new screener, TJX (TJX).

TJX operates as an off-price apparel and home fashions retailer in the United States and internationally. The company sells family apparel, home fashions, seasonal items, jewelry, and other merchandise and operates stores under various names, including T.J. Maxx, Marshalls, and Sierra Trading. TJX was founded in 1956 and is based in Framingham, Massachusetts.

TJX ranked #4 on my top ten list for May and earned a 7-star rating.

Here is a yield channel chart for TJX:

TJX is trading near the undervalued yield line of 1.81%, which happens to be the same for the 9-year and 5-year timeframes. Given the stock's annualized dividend of $1.56, undervalued yield corresponds to a stock price of $86.19.

TJX closed at $88.11 per share, so the stock is trading about 2% above the undervalued line.  Nevertheless, I think it is a good time to consider opening a position in TJX and I'll be doing a stock analysis of TJX soon.

Concluding Remarks

In my DivGro Pulse articles, I focus on the strategy of dividend growth investing as it pertains to my portfolio, DivGro. I monitor the health of dividend growth stocks in DivGro, update fair value estimates, and determine undervalued stocks suitable for further investment. I also look at candidates for new positions.

Using yield channel charts helps me to determine potential buy and sell levels based on the historical dividend yield patterns of individual stocks. These charts are great for identifying undervalued stocks and I find them useful in guiding sell decisions.

In this article, I identified WBA and CMCSA as candidates for additional investment, while TJX seems like a good candidate for a new position.

Thanks for reading and take care, everybody!


  1. Ferdis: I think your analysis, logic, and record keeping are superb and I am attempting to "emulate" much of what you publish. The thing that I would find most interesting is if you could say a little about the software programs you use to manage and display your data. I use Excel 2010 almost exclusively and find the number of different sheets/tabs/workbooks to be almost unmanageable, or at least, highly inefficient. I am considering trying to develop my own relational database (Access 2010) to manage the data and more efficiently display the various charts, tables and reports.

    What do you think?Can you say more about your software use and approach?

    Many thanks for all that you share.


    1. Hi, Ken45140 -- thanks for your kind words!

      I use Google Sheets almost exclusively. The reason I switched from Excel is for the googlefinance() function, which provides a lot of the data I use. Lately, I've also used an add-on from, which provides even more fundamental data. It has some download limitations though (as far as the number of tickers you can track in the same sheet).

      I think I have the same issue you have with the number of different Sheets I use. I can (but don't have the time to) develop my own system, so I've been tinkering with the spreadsheets for years. Actually, if I had more time available, I would develop a web-app based system.


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