Monday, January 25, 2016

The Benefits of Automatic Investing

The first three weeks of this month have been terrible for investors worldwide. It could be painful to watch your portfolio value decrease day after day. The funny part is now we have a lot of bargains, relative to what we had just a month ago. However, many investors find it psychologically difficult to add to a position, which then gets even cheaper.

This is why I am happy that I set myself up to buy stocks automatically in 2016, through my bi-weekly 401 (k) contribution.

I am also happy that I set my dividends to automatically reinvest in 2016 for tax-deferred accounts.

Of course, when you have decided that you will live off dividends in 2016, and invest the rest of the contributions through tax-deferred accounts in order to build up the tax efficiency of your portfolio, you get another sort of challenges as well.


The interesting part is that I will be spending my taxable dividends in 2016, along with any side income I generate. The activity in 2016 is a great simulation for me, in order to see how I would feel if I decide to live off dividends and see great dividend bargains where I cannot really participate in. My consolation today is that my 401 (k) gets new money invested twice per month, but in a real retirement I probably will be unable to invest a significant amount during downturns.

If I had some extra cash on hand however, I would be eyeing dividend champion companies where:

1) The P/E ratio is below 20
2) The dividend yield is above 2%
3) The dividend payout ratio is below 60%
4) Annual dividend growth is higher than 4%
5) The dividend has been increased every single year for at least 25 years ( being a dividend champion)

Using these parameters on the list of dividend champions, I came up with the following list of companies for further research:

Name
SYMBOL
P/E
YIELD
DIV/SHARE
EPS
PRICE
DPR
Dividend growth
Sonoco Products Co.
15.9
3.67%
1.4
2.38
37.84
58.82%
4.06%
Bemis Company
18.14
2.53%
1.12
2.45
44.47
45.71%
4.52%
Cincinnati Financial
14.06
3.33%
1.84
3.9
54.79
47.18%
4.59%
Eagle Financial Services
10.06
3.40%
0.8
2.29
23
34.93%
4.81%
Commerce Bancshares
15.14
2.31%
0.9
2.52
38.76
35.71%
4.83%
Telephone & Data Sys.
11.68
2.56%
0.56
1.84
21.52
30.43%
4.89%
1st Source Corp.
12.4
2.52%
0.72
2.19
27.16
32.88%
5.18%
RPM International Inc.
20.93
2.82%
1.1
1.9
39.72
57.89%
5.63%
Tompkins Financial Corp.
13.66
3.36%
1.76
3.8
51.93
46.32%
5.78%
Stanley Black & Decker
19.22
2.30%
2.2
4.94
95.12
44.53%
6.50%
Questar Corp.
15.28
4.41%
0.84
1.25
19.09
67.20%
6.56%
Genuine Parts Co.
17.33
3.14%
2.46
4.64
80.4
53.02%
6.94%
Leggett & Platt Inc.
21.51
3.34%
1.28
1.86
39.95
68.82%
7.26%
UGI Corp.
20.32
2.75%
0.91
1.6
32.51
56.88%
7.44%
Emerson Electric
10.97
4.40%
1.9
3.99
43.8
47.62%
8.35%
Johnson & Johnson
18.51
3.08%
3
5.21
96.5
57.58%
8.75%
3M Company
18.1
2.96%
4.1
7.74
140.02
52.97%
9.33%
MSA Safety Inc.
18.11
3.33%
1.28
2.17
39.365
58.99%
9.34%
Pentair Ltd.
16.59
2.99%
1.32
2.72
45.13
48.53%
9.43%
ExxonMobil Corp.
16.08
3.82%
2.92
4.73
76.14
61.73%
9.71%
Air Products & Chem.
20.42
2.71%
3.24
5.88
120.09
55.10%
9.86%
Dover Corp.
9.75
3.16%
1.68
5.56
54.19
30.22%
11.52%
Eaton Vance Corp.
14.7
3.84%
1.06
1.92
28.25
55.21%
11.56%
Weyco Group Inc.
13.98
3.35%
0.8
1.78
24.89
44.94%
12.19%
Archer Daniels Midland
11.41
3.67%
1.12
2.9
33.03
38.62%
12.66%
Wal-Mart Stores Inc.
13.44
3.13%
1.96
4.67
62.75
41.97%
12.89%
Illinois Tool Works
16.46
2.69%
2.2
5.05
83.07
43.56%
13.11%
AFLAC Inc.
9.98
2.90%
1.64
5.71
57.06
28.72%
13.64%
Parker-Hannifin Corp.
13.95
2.87%
2.52
6.53
91.13
38.59%
15.96%
Computer Services Inc.
18.89
2.78%
1
1.98
37.5
50.51%
16.17%
Franklin Resources
10.37
2.18%
0.72
3.29
34.15
21.88%
16.23%
T. Rowe Price Group
14.43
3.17%
2.08
4.63
66.83
44.92%
16.29%
Donaldson Company
19.94
2.57%
0.68
1.38
27.54
49.28%
16.95%
W.W. Grainger Inc.
16.64
2.51%
4.68
11.36
189.3
41.20%
17.44%


This list of course is not an automatic buy. The investor needs to evaluate each company to determine whether earnings are rising, whether they understand the business, and whether they believe that the business can stand to earn more over time. This is the part that proves the point that investing is part art, part science. If I had a list of several quality companies available at fair values, I could automatically purchase those companies through a broker like Motif Investing.

Full Disclosure: Long GPC, EMR, JNJ, XOM, APD, EV, ADM, WMT, AFL, ITW, TROW, GWW

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
39 Dividend Champions for Further Research
Living off dividends in 2016 – My New Goal
What drives future investment returns?
Dividend Investors: Stay The Course

6 comments:

  1. Hi DGI:

    Great article and a good place to start investigating potential candidates. Are the DGR numbers (last column) for the last 5 years or the last 10 years? Could you please clarify.

    Thank you

    Al

    ReplyDelete
    Replies
    1. Hi AL,

      It is 10 year annual dividend growth.

      Best regards,

      DGI

      Delete
  2. Hi DGI, I've recently come across your site and love the info you provide in your blog posts. Quick question: how did you scan these companies that fit your criteria? Is it a manual process, or do you use a particular screener and enter your search parameters (i.e. PE < 20%, yield >2%, etc)? Thanks!

    ReplyDelete
    Replies
    1. I have a list in Yahoo Finance, which I "manually screened" in excel ( copy-)paste) using the criteria I had chosen.

      Alternatively, you can possibly build a google docs spreadsheet, and have the information automatically populated, so you can screen as you want. The issue is sometimes data feeds could be messy. So I stick to the first approach.

      Delete
  3. A lot of great names there. Can't believe there are bargains everywhere and even more surprised as the market is still going down. My DRIP is fully set up on all my tax deferred/ tax free accounts to take advantage of the bargains. I am thinking of reserving cash for a while considering the downturn but as you know hoarding cash is the toughest part of investing.

    Thanks for sharing!

    BeSmartRich

    ReplyDelete
  4. I have many of the same metrics, for initial positions:
    1) The P/E ratio is below 20
    2) The dividend yield is above 2%.

    I don't mind if payout ratios drift north of 60%, or dive to 30%, that's out of my control.

    I also have a bias to dividend aristocrats and champions, although I only own a handful of U.S. stocks. I index more of my U.S. assets as I get older, and I don't buy anything international directly (i.e., stocks outside the U.S., I strictly index invest that and likely always will).

    ReplyDelete

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

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