Tuesday, February 18, 2014

How to find long term dividend stock ideas

One of the easiest ways to find long-term dividend stock ideas is the list of dividend champions, that David Fish maintains and updates every single month. The list includes 106 companies which have managed to boost dividends for at least 25 years in a row. This is not a small accomplishment, given the fact that the past quarter century included several wars, a few bubbles bursting, several recessions, the collapse of the Soviet Union, and the economic rise of emerging markets such as China, India, Russia and Brazil. Thus, the list of companies which have been able to reward their patient shareholders with a dividend hike for 25 years in a row, is a good start for the search of dividend stock ideas.

The next step in the process would be to apply a quantitative screen against that list of companies, in order to weed out those firms that are overvalued, and those who are at risk of falling on hard times. I usually look for companies that sell below 20 times earnings, and have a minimum yield of 2.50% today. In addition, I look for a dividend payout ratio below 60%, plus a minimum of a 6% in annual dividend growth over the preceding decade. I also apply that criteria in order to narrow down the list of dividend champions to a more manageable level.

When I apply my screening criteria on the list of dividend champions, I come up with the following list of companies for further research.

SYMBOL
Name
P/E
YIELD
DPR
10 yr DG
PRICE
Analysis
(ORI)
Old Republic International
9.8
4.70%
45.86%
7.26%
15.39

(CVX)
Chevron Corp.
10.23
3.50%
36.07%
10.55%
113.48
(EFSI)
Eagle Financial Services
11
3.60%
34.29%
7.32%
23.1

(XOM)
ExxonMobil Corp.
12.77
2.70%
34.19%
9.64%
94.11
(HP)
Helmerich & Payne Inc.
13.13
2.80%
36.23%
23.31%
90.59

(TMP)
Tompkins Financial Corp.
13.56
3.40%
46.24%
6.25%
46.92

(TGT)
Target Corp.
15.01
3.10%
45.99%
19.78%
56.06
(CINF)
Cincinnati Financial
15.06
3.70%
56.41%
6.41%
47

(WEYS)
Weyco Group Inc.
15.07
2.80%
42.35%
14.55%
25.66

(UGI)
UGI Corp.
17.01
2.60%
43.97%
6.94%
43.66

(MCD)
McDonald's Corp.
17.26
3.40%
58.38%
22.80%
95.78
(PEP)
PepsiCo Inc.
18.08
2.90%
52.55%
13.71%
78.09
(BMS)
Bemis Company
19.15
2.80%
52.94%
6.39%
39.06
(JNJ)
Johnson & Johnson
19.3
2.80%
54.89%
10.84%
92.76
(MMM)
3M Company
19.66
2.60%
50.89%
6.76%
132.12
(KMB)
Kimberly-Clark Corp.
19.93
2.90%
58.59%
9.16%
110.24

The next step in the process is to evaluate each and every company on that list. When I analyze individual companies, I look at trends in earnings, revenues, dividends, payout ratios and ability to deploy cash successfully. Next, I also try to understand how companies earn their money, and whether they possess a durable competitive advantage, that would allow them to keep earning money for the next 20 – 30 years. In order to determine that, you need to look for competitive advantages or as Buffett calls them “wide moats”. I also try to determine any catalysts for future earnings growth. It is very important to understand that rising earnings are the fuel that will make future dividend increases possible. As you can see, there are a few companies on my list for further analysis, which I have not posted here yet. I am diligently working my way through the list.

I believe that if you patiently follow the above process every month, and put money to work consistently, you will be able to build yourself a diversified dividend portfolio that will pay your monthly expenses. Reaching your dividend crossover point will be dependent on the amount of money you can put to work, the types of companies you manage to put your money in and the amount of time you can let compounding work in your favor.

The most important thing for you to do is to keep learning more about investments, companies, and business, in order to be able to keep up with changes. Keeping an open and inquiring mind is the winning attitude that will pay big dividends for you down the road.

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
Dividend Champions Index – Five Year Total Return Performance
How to read my stock analysis reports
The work required to have an opinion
Diversified Dividend Portfolios – Don’t forget about quality

7 comments:

  1. Thanks for your articles. Keep 'em coming.

    I would like to see analysis of some of the "minor" companies on that list.

    They are not the heavyweights. But are they worth putting money into if they are not household names?

    --Joe

    ReplyDelete
  2. This is a good process to go through each month. Looks like you have a wide range of companies of interest. About how many companies do you own in your portfolio?

    Personally, I've done a process similar to this when I first started to invest and created my watch list of the companies I wanted to purchase. Now, I go through each month companies that increased dividends and occasionally I'll find a new company to include in my watch list that interests me. But I don't want my list to get too large and overwhelming or else it becomes nearly impossible to stay on top of all the companies.

    ReplyDelete
  3. "My Name": The small companies on that list have pretty dinky dividend growth rates. Some of them, like Eagle, are pretty small market caps. There are other smaller companies out there that are worth looking at, but none of them are on this list.

    ReplyDelete
  4. Hi Joe and Unknown,

    The issue comes when checking the dividend growth in the past 5 or past 1-2 years. If it slows down, I might not even review the company. Also, i might not even post a review of a company even if I analyze it for myself, if I don't understand it. I do not understand every company out there, so I should stick to what I am familiar with. Even if I am familiar with something, that doesn't mean it is soemthing I would ever invest in. Case in point is US telecoms, which I am not very fond of. That of course doesn't mean they might not be a good investment, it just means I won't be putting my money there.

    DGSI,

    I follow a lot of companies, both dividend growth ones and even those that might one day become ones. My goal is to be in position to be familiar with almost any company in the world that has managed to boost dividends for at least a decade. There are a few hundred of those. I would much rather invest in 100 companies and put my new money or dividend money in something that is valuable today and will grow, than reinvest my cash in companies I already own, which however might not be offering the best values at the moment.

    Of course, just because I do something, doesn't mean everyone should do what I do.

    I also review the list of dividend increases every single week, to monitor my holdings, and search for uncovered dividend gems.

    ReplyDelete
  5. Great articles D.G.I.

    But I'm from Belgium, Europe. Do you know where to find these kind of stocks or stocklists for European stocks?

    Gr
    Ronald

    ReplyDelete
  6. What do you use for a data source to research past dividend payouts and increases ?

    ReplyDelete
  7. What's your thinking re: dividend reinvestment? Do you do it across the board or selectively only when the
    investment conforms to your initial investment criteria?

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

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