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Thursday, June 20, 2019

Twenty-Four Attractively Valued Dividend Champions for Further Research

I monitor the list of dividend champions regularly, using my screening criteria. This is helpful to identify quality companies available at good prices, which may be good additions to my portfolio at the right time.

My screening process helps me narrow down the list of dividend champions to a more manageable level for further research. This of course is the first phase in company selection process; once the list is narrowed down to a more manageable level,

The screening criteria I used includes the following factors:

1) A dividend streak of annual dividend increases exceeding 25 years

This is understandable, since to be a dividend champion, a company needs to have increased dividends for at least 25 years in a row. I view a long streak of annual dividend increases as an indicator of business quality. After all, only a certain type of company can afford to grow the business, while also showering shareholders with more cash each year for over a quarter of a century. A long streak of dividend increases is a testament to a consistency in a business, strong competitive advantages, and an industry that quietly builds wealth to long-term shareholders over time.

2) A forward P/E ratio below 20

I want to remain disciplined, and focus on companies which are not overvalued. I do not want to overpay for future growth, as I also do not want to buy a cheap company that doesn’t grow either. To me valuation is important, because even the best company in the world may not be worth purchasing at an inflated price .If you overpay for a security, future returns could suffer, because you lock in a lower yield at the start.

3) A forward dividend payout ratio below 60%

I want to have a margin of safety in the dividend payment, which is what a lower dividend payout ratio helps to identify. I am after companies that reinvest a portion of earnings to grow the business and distributes the excess to shareholders. An adequate payout ratio provides a buffer in case there is some short term fluctuations in earnings.

4) Annual dividend growth exceeding 5% over the past five and ten years

Historical dividend growth has been around 5% - 6% on US stocks over the past 90 years. I wanted to find companies which consistently grow dividends, and do not materially decrease them over time. I also screened out companies whose last raise was less than 5%. Again, I value consistency in dividend growth.

5) A history of rising earnings per share over the past decade

Rising earnings per share are the fuel behind future dividend increases. There is a natural limit to dividend growth, if a company does not grow its bottom line. A company that grows earnings per share can afford to increase dividends, and reinvest more into the business. This also provides an additional margin of safety in the dividends, because a company has more tools within its disposal to tackle things such as a temporary high payout ratio. By growing earnings, a company can simply grow itself out of a higher payout ratio, as dividends grow slightly slower until the payout is normalized.


As a result of running this screen, I ended up with a list of the following dividend champions for further research:


Name
Symbol
Number of Annual Dividend Increases
Last Price
Annual Div Rate
Annual Div Yield
Dividend Payout Ratio
Forward P/E
5yr Dividend Growth
10yr Dividend Growth
Most Recent Increase
A.O. Smith Corp.
AOS
25
45.25
0.88
1.94%
32%
     16.70
     27.00
     19.94
     22.22
BancFirst Corp. OK
BANF
25
57.56
1.2
2.08%
32%
     15.27
       9.53
       8.54
     42.86
Carlisle Companies
CSL
42
136.68
1.6
1.17%
22%
     18.42
     12.89
       9.88
       8.11
EV
38
41.93
1.4
3.34%
44%
     13.31
       9.31
       7.78
     12.90
Franklin Electric Co.
FELE
27
45.8
0.58
1.27%
24%
     19.08
       8.92
       6.57
     20.83
General Dynamics
GD
28
173.59
4.08
2.35%
35%
     14.82
     10.63
     10.48
       9.68
Genuine Parts Co.
GPC
63
102.92
3.05
2.96%
51%
     17.30
       5.69
       6.33
       5.90
Gorman-Rupp Company
GRC
46
30.66
0.54
1.76%
32%
     18.04
       9.10
       7.14
       8.00
W.W. Grainger Inc.
GWW
48
271.87
5.76
2.12%
32%
     15.10
       8.35
     13.21
       5.88
ITW
44
149.21
4
2.68%
50%
     18.72
     16.45
     11.25
     28.21
Johnson & Johnson
JNJ
57
140.23
3.8
2.71%
44%
     16.34
       6.45
       7.03
       5.56
LOW
56
99.31
2.2
2.22%
36%
     16.39
     21.22
     18.36
     17.07
MDT
41
97.96
2
2.04%
39%
     19.02
     12.20
     11.88
       8.70
McGrath Rentcorp
MGRC
27
60.98
1.5
2.46%
44%
     18.04
       6.03
       5.08
     10.29
MMM
61
171.86
5.76
3.35%
55%
     16.32
     16.45
     10.52
       5.88
Parker-Hannifin Corp.
PH
63
166.56
3.52
2.11%
30%
     14.30
     10.56
     12.32
     15.79
PPG
47
114.68
1.92
1.67%
31%
     18.38
       8.98
       5.94
       6.67
Stepan Company
SCL
51
90.84
1
1.10%
20%
     17.85
       7.31
       8.09
     11.11
SEI Investments Company
SEIC
28
54.34
0.66
1.21%
21%
     17.53
     11.38
     14.87
     10.00
1st Source Corp.
SRCE
32
45.25
1.08
2.39%
31%
     12.93
       9.20
       6.18
       8.00
Stanley Black & Decker
SWK
51
144.56
2.64
1.83%
31%
     16.93
       5.44
       7.43
       4.76
TROW
33
107.4
3.04
2.83%
44%
     15.48
     13.00
     11.30
       8.57
United Technologies
UTX
25
126.62
2.94
2.32%
37%
     16.01
       5.25
       7.74
       5.00
WBA
43
52.8
1.76
3.33%
29%
       8.64
       7.32
     15.01
     10.00


I just wanted to caution you that this is not an automatic recommendation to buy or sell securities. I am not a financial advisor, just someone who writes about dividend investing. Any decision you make about investments is solely your responsibility. This means that each company needs to be analyzed in detail, both from a quantitative and qualitative standpoint. In addition, just because a company looks attractively valued today, that doesn’t mean that this company cannot get cheaper from here.

Furthermore, I am sharing a rudimentary process for screening the list of dividend champions on a regular basis, in order to show investors how I go about identifying companies, and build a diversified portfolio over time. I have found that the ability to stick to a process, invest regularly, and to keep holding through patiently thick or thin is my edge in investing. By sharing my experience, I am hopeful to inspire you into developing your own methodology, and use it to work towards your financial objectives.

Relevant Articles:

How to determine if your dividends are safe
- 2019 Dividend Champions List
Stagnant earnings create a risky environment for dividend investors
Investing is part art, part science