Wednesday, January 29, 2020

Recent Sells

I've adopted the DVK quality scoring system as the primary way to assess the quality of dividend growth [DG] stocks. I love the simplicity of the system, which does a remarkable job identifying high-quality stocks!

Another recent addition to my evaluation process is the use of the so-called Chowder Number [CDN], a popular metric that favors DG stocks likely to produce annualized returns of at least 8%.

I now regularly rank my DivGro stocks by quality score and by CDN. Following a recent ranking, I identified two weaker positions that I decided to eliminate. This article provides details.

Background


In the past year or so, I've focused on improving DivGro's risk profile by eliminating riskier positions. Using the DVK quality scoring system, I targeted lower quality DG stocks that could negatively impact DivGro's performance if and when the markets turn bearish. 

I'm also looking to improve DivGro's growth prospects, specifically by favoring stocks with higher dividend growth rates [DGRs]. I have a strong sense that high-DGR stocks perform better in the long run when considering total returns. For this reason, I now look at the CDN for some guidance.

The CDN is obtained by adding a stock's current dividend yield to its 5-year DGR. 

Stocks likely to deliver annualized returns of 8% are those with a CDN ≥ 12 (for yields ≥ 3%), CDN ≥ 15 (for yields < 3%) and CDN ≥ 8 (for Utility stocks yielding at least 4%). In my ranking tables, I color these favorable CDNs green. 

On the other hand, stocks unlikely to deliver annualized returns of 8% are those with CDN < 8 (for yields  ≥ 3%), CDN < 10 (for yields < 3%) and CDN < 5 (for Utility stocks yielding at least 4%). In my ranking tables, I color these unfavorable CDNs red. 

The CDN's between these ranges are color-coded yellow. Stocks with CDNs in the yellow zone are less likely to deliver annualized returns of 8%.

Assessment


Below is a summary DivGro stocks with unfavorable CDNs:

Rank Ticker Company Yrs VL
Safety
Rank
VL
Fin. 
Stren.
M*
Econ.
Moat
S&P
Credit
Rating
SSD
Divi.
Safety
Qual Yield 5-Yr
DGR
CDN Fair
Val.
Price (Disc.)
Prem.
1JNJJohnson & Johnson571A++WideAAA99252.53%6.3%  9  153149.94(2%)
3MRKMerck91A++WideAA99252.82%4.6%  7  9186.40(5%)
4PGProcter & Gamble631A++WideAA-99252.36%3.1%  5  116126.339%
5NSRGYNestlĂ© SA231A++WideAA-99251.82%2.6%  4  107111.574%
17INTCIntel51A++WideA+96241.87%7.0%  9  7267.42(7%)
24CVXChevron321A++NarrowAA85244.27%2.5%  7  129111.42(14%)
37KOCoca-Cola571A++WideA+80232.79%5.6%  8  5257.2511%
40CBChubb261A+NarrowA99221.98%2.9%  5  161151.44(6%)
44VZVerizon Communications151A++NarrowBBB+87224.05%2.5%  7  6560.79(6%)
51CMICummins142A+NarrowA+98213.16%-2.0%  3  188165.72(12%)
58XELXcel Energy161A+NarrowA-79212.42%6.2%  9U6267.088%
59TAT&T361A++NarrowBBB65215.37%2.1%  7  5138.72(24%)
65SWKStanley Black & Decker522ANarrowA90201.67%5.8%  7  166165.44(0%)

The table provides quality indicators and quality scores along with key metrics of interest to DG investors, including years of consecutive dividend increases (Yrs), the dividend Yield for a recent stock Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

I also provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.

Notice that NestlĂ© SA (NSRGY) and Stanley Black & Decker (SWK) have the lowest current yields of stocks in with unfavorable CDNs. Furthermore, NSRGY has a CDN of 4, which is well below the 10 required to be in the yellow zone. Similarly, SWK has a CDN of 7, also well outside the yellow zone.

I decided to close my NSRGY and SWK positions and redeploy the capital in a better way. Specifically, I'll reinvest the money in existing DivGro positions with favorable CDNs. A follow-up article will provide details.

Trade Summary (NSRGY)


I bought 15 shares of NSRGY in August 2019 at $107 per share and sold those shares for $110.84 per share. NSRGY pays dividends annually, and I've not held these shares long enough to receive any dividends.

Here is a summary of my trades, along with a net profit analysis:

2019-08-02
Bought 15 shares of NSRGY at $107.00 per share:
$
1,605.05
2020-01-27Sold 15 shares of NSRGY at $110.84 per share:$1,662.57
                                               
               

Capital Gain:
$
57.52

Dividends Received:
$
0.00

Commissions/Fees/Taxes:
$
0.00
Net Gain: $57.52

I made a net gain of 3.6% on the original amount invested, which is a gain of 7.4% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $36.35.

Trade Summary (SWK)


I bought 50 shares of SWK in February 2017 at $127.16 per share and sold those shares for $163.36 per share. I received dividends totaling $385.

Here is a summary of the trades and dividends received, along with a net profit analysis:

2017-02-24
Bought 50 shares of SWK at $127.16 per share:
$
6,358.05
2017-03-21
 Dividend on 50 shares at 58¢ per share:
 $
29.00
2017-06-20
 Dividend on 50 shares at 58¢ per share:
 $
29.00
2017-09-19
 Dividend on 50 shares at 63¢ per share:
 $
31.50
2017-12-19
 Dividend on 50 shares at 63¢ per share:
 $
31.50
2018-03-20
 Dividend on 50 shares at 63¢ per share:
 $
31.50
2018-06-19
 Dividend on 50 shares at 63¢ per share:
 $
31.50
2018-09-18
 Dividend on 50 shares at 66¢ per share:
 $
33.00
2018-12-18
 Dividend on 50 shares at 66¢ per share:
 $
33.00
2019-03-19
 Dividend on 50 shares at 66¢ per share:
 $
33.00
2019-06-18
 Dividend on 50 shares at 66¢ per share:
 $
33.00
2019-09-17
 Dividend on 50 shares at 69¢ per share:
 $
34.50
2019-12-17
 Dividend on 50 shares at 69¢ per share:
 $
34.50
2020-01-27Sold 50 shares of SWK at $163.36 per share:$8,167.82
                                               
               

Capital Gain:
$
1,809.77

Dividends Received:
$
385.00

Commissions/Fees/Taxes:
$
0.00
Net Gain: $2,194.77

I made a net gain of 34.5% on the original amount invested, which is a gain of 11.8% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $138.


Concluding Remarks


I use the DVK quality scoring system to assess and rank DG stocks. I also use CDNs to inform my investment decisions.

A recent analysis indicated that NSRGY and SWK were two of DivGro's weakest positions and unlikely to deliver annualized returns of at least 8% going forward.

As I'm looking to improve DivGro's growth prospects, I decided to close my NSRGY and SWK positions and to reinvest the money in existing DivGro positions with favorable CDNs. I'll write another article to provide details.

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