March 2014 10-Year YOC CCC Rankings



*photo courtesy of ESPN

Well, it’s time for another month of my CCC rankings by 10-year YOC.

What I Did

I decided to take the CCC spreadsheet and rank the stocks based on their 10-year YOC.  If you are unfamiliar with what Yield-On-Cost is (YOC) then refer to my resources tab or see below for an example.  If you don’t know about David Fish’s Champion, Challenger and Contender (CCC) spreadsheet then you are doing yourself a disservice, the link is also on my resources tab.

Let’s say you purchased a stock at $10/share in 2013 that paid a 4% dividend or $0.40/share. In order to achieve a 10-year YOC of 10% that stock would need to pay out at least $1.00/share by 2023.

You may wonder why I care about a 10-year YOC instead of just the 1,3,5 and 10-year CAGR’s. The main factor that the CAGR leaves out is the starting dividend yield.  The starting dividend in combination with the dividend growth rate will greatly influence your returns.

There’s a variation of this screen used alot by members of the Seeking Alpha community and it’s coined the “Chowder Rule”.  This can also be found now on the CCC sheets.  The rule basically adds the starting yield with the dividend growth rate (5-year CAGR) and looks for it to be higher than a certain number.  While this can be a useful screen, there is still a discrepancy between dividend payers that have different growth rates but still arrive at the same number.  For instance, a 3% yielder with 5% growth would get the same grade (an 8) as a 5% yielder with 3% growth.  Holding a lower yielding stock with a higher growth rate will at some point provide higher returns assuming the growth rates don’t change.  My 10-year YOC would give this 3% and 5% yielder a 4.9 and 6.7 respectively.

Why I Did It

The purpose of this screening process will be to identify unfamiliar companies that have a high expected dividend growth rate combined with a starting yield that would produce greater returns. These companies may be good candidates for further research.

How I Did It

The first step was to sort all stocks by their current dividend yield and eliminate any stocks not paying at least a 2% yield.  

Next I sorted all columns by TTM P/E and eliminated every stock with a TTM P/E over 18.  I do realize this eliminates a lot of REIT’s, MLP’s, and telecom stocks.  I’m ok with this since I’m not really targeting these stocks right now.  

Then I decided to eliminate any Champions with a 10-Year CAGR < 5%, followed by any Contenders with a 5-Year CAGR < 7 % and finally any Challengers with a 3-year CAGR < 7%.

This last screen dropped the list of Champions, Contenders and Challengers to 18(-3), 37(+2) and 40(+5) respectively.

Next I took the latest CCC sheet and added some new columns to calculate a 10-year YOC using each stock’s 1,3, 5 and 10-year compound annual growth rate (CAGR). I will call these new metrics 10YOC1, 10YOC3, 10YOC5, and 10YOC10 for simplicity.

After sorting, I looked for any companies that had a 10YOC1, 10YOC3, 10YOC5 or 10YOC10 of 10% or higher. I applied this to the list of Champions, Contenders and Challengers. 
Next, I wanted to look to see if the DGR was increasing or decreasing. I highlighted in red the 10-year YOC’s of companies that were both reducing their rate of increases and still under 10%.

This is a previous example of how it looked:

Companies got credit for increasing their dividends at faster rates. For example: The 10YOC5 for AWR in the example above was 4.97 and did not get highlighted in red because its 10YOC5 was higher than its 10YOC10 of 4.09.
Next, I decided to remove any company that had a 10YOC1 in the red for Champions and a 10YOC1 or 10YOC3 in red for Contenders and Challengers.
For the Example Champions list above this removed LEG, MDT, NUE and WMT.
This elimination dropped the list sizes for the Champions, Contenders and Challengers to 4(-2), 11(0) and 26 (+6) respectively.   

My Results
Here are the 41 candidates left that may be worthy to do further research on.  

Champions


 (click to enlarge)


Contenders


 (click to enlarge)


Challengers


(click to enlarge)

The total list size went up by 4 from last month.
A few names on the Champions list are now removed as their prices have moved higher.  The companies no longer on my list are FDO and CVX.   HP is still on the list even though the stock has moved 10 points higher.  One of the best values I still see is TGT.  I’ve got a pretty full position and prices have come up a little lately so I’m content for now.

WEC is new on the Contenders list.  I own COP, CAT and LMT that are on this list.

RCI officially made the Challenger list this month after dropping a few points.  I own PM and TGH from this list.

Keep in mind that this is just a starting point and I feel these companies need further research before making an investment.

You can find previous months by following my CCC Rankings label.

Comments

  1. says

    That is a great idea!

    First I look only for: dividend growth -> 1-year,3-years, 5-years and so on…
    The more data, the more years…

    Second I decide to look at the profit growth – Since I’m working on it instantaneous!

    Third in the future: Will the company buy back shares?

    And your idea will be No.4 in the future…

    Really great idea!

    Best whishes!
    D-S

    • says

      Hi D-S,

      I’m glad you found this helpful. Those first three things you mentioned are very important. There’s so many metrics you can use to screen companies though. I think the important thing is to stick to a good plan.

      Thanks for stopping by!

  2. says

    Good stuff here, I would also search for companies that have less than 5 years that may be future champs with less than 2% yields such as MA, SBUX and AAPL…I know this maybe difficult, but many times investors miss a truly precious opportunity….

    Regards,
    Joe

    • says

      Hi Joe,

      Thanks. There are 2 main reasons I rule out the under 2% yielders. The first is that the dividend growth to achieve a 10-year YOC of 10% or better would be extremely high. This high level of growth is hard to predict many years into the future. Secondly, I am trying to reach FI in a short amount of time, approximately 6 years from now. There’s not a lot of time to let the higher dividend growth to surpass the higher initial yielders with lower growth rates. I do agree that this screen probably leaves out some great companies as almost any screen will. SBUX actually yielded close to 4% in the last 5 years or so I believe. AAPL just started paying a dividend so they never would have been on the screen until recently. I’m also looking for dividend growth over total return since I don’t plan on selling off shares.

      Keep up the good work with the articles and thanks for stopping by!

  3. says

    Thank you for posting this. I truly appreciate it. I just started getting into DGI and your monthly posts are helpful. I actually just bought TGT yesterday. I know the share price was higher than it was 2 weeks ago but i felt I was still getting good value. Seeing them on your list this month validates my purchase.

    • says

      Hi Richie,

      I’m glad you liked it! I enjoy doing these.

      Congrats on starting the DGI route. I certainly sleep much better at night not worrying about speculative companies in my portfolio. I’m sticking to companies with large moats and proven track records for the most part that just keep paying rising dividends.

      I still really like TGT. I think we’ll both be glad we picked up shares here in a few years. I don’t mind waiting for them to increase in value since they keep paying higher dividends and I can keep picking up shares cheaply.

      Take care!

    • says

      Hi Charles,

      Thanks. I agree with you! Most of these companies I’m buying are for the long-term as long as fundamentals don’t change. KO is one of those wonderful companies that has been raising dividends for over 50 years now. I plan to hold mine that long as well!

      Cheers!

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