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Dividend Investment Portfolio

I attempt to screen and purchase undervalued dividend growth stocks. These companies have increased their dividend for at least 15 years and have a lower than average price to earnings (PE) ratio, a higher operating margin, a low price to book, a reasonable dividend yield and payout ratio.  This is easily my favorite part of my financial empire.

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Dividend Investment Portfolio

March 2020 Undervalued Dividend Growth Screen and Purchase

by Evan

While I am putting my head in the sand when it comes to my net worth statement, I am actually excited to get a purchase or two under my belt with my new dividend screener for 2020.

Screening for Undervalued Dividend Growth Stocks

In the beginning I would only look for those companies with 25+ years of dividend growth history, and then I eventually moved it down to 20+ years. For the upcoming 9 months or so (maybe more), I will be starting with those companies that have increased their dividend from 15 to 24 years (taken from the dividend contender list). Currently, this whittles us down from thousands upon thousands of stocks to a list of 133.

A Manageable Dividend Payout Ratio

My first screen is to eliminate those companies with a dividend payout ratio of over 50%. A dividend payout ratio is,

the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. It is sometimes simply referred to as the ‘payout ratio.’

The dividend payout ratio provides an indication of how much money a company is returning to shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings). 

https://www.investopedia.com/terms/d/dividendpayoutratio.asp

A Low Price to Free Cash Flow

I originally stated that I would be searching for Free Cash Flow Yield, however, the screening tool I used (and will continue to use), ThinkorSwim, has Price to Free Cash Flow so I will use that metric. Price to Free Cash Flow,

The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow which adds back non-cash expenses such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.

***

The price-to-cash flow ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the price-earnings ratio. The price-to-cash flow ratio is said to be a better investment valuation indicator than the price-earnings ratio, due to the fact that cash flows cannot be manipulated as easily as earnings, which are affected by depreciation and other non-cash items. Some companies appear unprofitable because of large, non-cash expenses even though they have positive cash flows.

***

https://www.investopedia.com/terms/p/price-to-cash-flowratio.asp

March 2020 Dividend Growth Undervalued Watch List

After those two metric screens I was left with the following 13 stocks:

Acme United Corp.ACU
Ameriprise Financial Inc.AMP
Andersons Inc. (The)ANDE
Best Buy Corp.BBY
CenterPoint EnergyCNP
Donegal Group Inc. ADGICA
Hawkins Inc.HWKN
Landmark Bancorp Inc.LARK
Nu Skin Enterprises Inc.NUS
Bank OZKOZK
Ryder SystemR
Republic Bancorp KYRBCAA
Travelers CompaniesTRV

Almost every company on the list are new to me as they haven’t hit the 20 or 25 year mark yet, which means I am going to need a way to whittle it down a bit further before looking deep into the company. The secondary items below are going to change month to month depending on how many companies I have to look into.

First I wanted to test each company’s P/E:

Acme United Corp.ACU16.05
Ameriprise Financial Inc.AMP10.21
Andersons Inc. (The)ANDE33.61
Best Buy Corp.BBY13.74
CenterPoint EnergyCNP17.61
Donegal Group Inc. ADGICA8.7
Hawkins Inc.HWKN15.25
Landmark Bancorp Inc.LARK10.05
Nu Skin Enterprises Inc.NUS8.14
Bank OZKOZK7.69
Ryder SystemR#N/A
Republic Bancorp KYRBCAA8.45
Travelers CompaniesTRV12.89

Since I still have plenty of choices, I pulled up each company to see what industry they were in and two in particular caught my eye – ACME United (Distributions) and Hawkins (Chemicals). I do not have either of these industries anywhere in my current portfolio.

First I researched to make sure that their outstnading shares were flat for the past 5 years or so:

Since that didn’t eliminate one (or both), and given the volatility we have faced this month with 700+ swings in both directions for the dow, I decided to look at each company’s 1 month chart:

I like that ACU didn’t crumble that much during those rough days. So I have decided to buy a lot of that on 3/4/2020. I am going to keep my eye on HWKN, and if/when we have another huge bounce I am going to open a position in HWKN as well.

Acme United

Acme is an interesting purchase for me not because of what it does:

Acme United Corporation supplies cutting, measuring, and safety products for the school, home, office, and industrial markets. The Company produces shears, scissors, rulers, first aid kits, utility knives, manicure products, medical cutting instruments, guillotine paper trimmers, and pencil sharpeners. Acme United extends its products and services throughout global networks.

but because it is tiny and thinly traded. This may be the smallest company I have ever purchased.

At a market cap of $79,000,000 and 435 employees it is basically a large-small business. I am kind of excited that this pushing the boundaries of where I am used to investing in.

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Dividend Investment Portfolio

Changing my Undervalued Dividend Growth Screening Process

by Evan

From time to time, I like to alter the metrics I use to screen for undervalued dividend growth stocks. I do this for one main reason, I don’t do this for a living, and no one has a monopoly on good ideas, so by changing up the metrics every so often I become exposed to companies that may otherwise be amazing (in terms of business and value) but were precluded from a previous screen.

In the beginning I was using the dividend aristocrats and then comparing P/E to industry average, Operating Margin to industry average, and Price to Book vs industry average. Eventually, I moved from dividend aristocrats to dividend champions (and eventually opened it up to all companies with 20+yrs rather than 25+yrs of dividend growth history). I tried different metrics like CAPE, acquirer’s multiple view of investing, payout ratio’s etc, and currently I am using:

  • 20+years of Dividend Growth
  • P/E of less than 15
  • Dividend yield of 2%
  • Payout Ratio under 55%
  • Free Cash Flow Yield over 6%

My 2020 Undervalued Dividend Growth Screen

What really prompted this post was a recent article that I read and can’t find to link to it, but the overall discussion was whether there was value in finding those dividend growth stocks that are on their way to become dividend champions or dividend aristocrats before they actually get there. I like the general concept, and it would open me up to companies I haven’t had the opportunity to take a look at. So, my first screen will be those companies that have increased their dividend for 15 to 24 years – this information will come for a part of the Dividend Contender’s list. I am using 15 years, because I want the company to have increased their dividend throughout the anomaly that was 2008.

Given that I want to foster a safe dividend stream my next two metrics are associated with the longevity of the dividend. First, a company will have to meet will be a dividend payout ratio of under 50%. Second, the company will have to have a free cash flow yield of 5%+. These two metrics will show that they are making money and are not giving it all out to shareholders. Finally, I will remove all companies with a P/E above 20.

Lastly, I will take a quick view of each remaining option to make sure they are responsible with their outstanding shares. Specifically, I am looking for companies that have either a flat outstanding share count or have been buying back their shares as that may continue to increase the value of my purchase (of course it depends on if the company was purchasing the shares at the right time).

Given the recent drop in the past two days, I am very excited to search for new companies next week!

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Dividend Investment Portfolio

February 2020 Undervalued Dividend Growth Stock Watch List and Purchase

by Evan

Every month I screen for possibly undervalued dividend growth stocks using very specific metrics which are described below and then make a purchase or two. While the metrics change every year or two, I have been doing this process for a long, long time. The reason that the metrics change every so often is that I don’t feel strong enough in one thought process, that I figure if I can build the portfolio using some of the best ideas from multiple people, I’ll end up in a pretty damn good place.

My goal by the end of the first quarter 2020 is to take a look at my metrics and determine what, if anything, would I like to change.

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is part of their DNA and so they’ll continue to do so.  I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price in it of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Over the past six months or so, I found that I was eliminating some otherwise investable stocks just because they were under 35% and that didn’t/doesn’t make a whole lot of sense to me.  So anything over 55% is eliminated.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My February 2020 Watch List and Purchase

After applying the above screen I went from 179 companies to 16. What is more worrisome is that I only had 6 last month! I think it has to do with changes in the underlying company as well as the decision to remove a market capitalization option I threw on but never really discussed.

NameSymbolP/E RatioDividend YieldFree Cash Flow YieldPayout Ratio
Bank OZKOZK8.413.53%15.83%26%
AFLAC Inc.AFL11.642.03%12.47%24%
Old Republic InternationalORI6.517.74%10.57%23%
1st Source Corp.SRCE13.212.43%10.00%31%
Eagle Financial ServicesEFSI11.493.18%9.73%35%
Citizens Financial ServicesCZFS11.852.75%9.52%32%
Community Trust Banc.CTBI12.133.42%9.36%40%
First Financial Corp.THFF12.102.35%8.97%27%
Eaton Vance Corp.EV12.193.04%8.95%41%
First of Long Island Corp.FLIC13.243.09%8.76%42%
Enterprise Bancorp Inc.EBTC10.502.06%8.62%22%
Nucor Corp.NUE10.553.31%7.64%39%
Norwood FinancialNWFL15.522.86%7.52%43%
Cullen/Frost BankersCFR12.973.03%7.43%41%
National BanksharesNKSH14.923.60%6.49%52%
Arrow Financial Corp.AROW13.932.98%6.07%41%
Cambridge BancorpCATC15.472.82%5.95%38%

I have a position in those companies that are italicized. Very interesting that all the remaining choices were banking companies except Eaton Vance (investments), Aflac (insurance) and NUE (steel). Instead of going deeper on which bank I wanted to purchase, I decided to split my normal lot ($500) instead of 2 or 3 lots between these 3 companies buying just a tiny amount in each one.

What are you buying this month?

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Dividend Investment Portfolio

January 2020 Undervalued Dividend Growth Screen and Purchases

by Evan

Every month I screen for possibly undervalued dividend growth stocks using very specific metrics which are described below and then make a purchase or two. While the metrics change every year or two, I have been doing this process for a long, long time. The reason that the metrics change every so often is that I don’t feel strong enough in one thought process, that I figure if I can build the portfolio using some of the best ideas from multiple people, I’ll end up in a pretty damn good place.

My goal by the end of the first quarter 2020 is to take a look at my metrics and determine what, if anything, would I like to change.

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is part of their DNA and so they’ll continue to do so.  I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price in it of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Over the past six months or so, I found that I was eliminating some otherwise investable stocks just because they were under 35% and that didn’t/doesn’t make a whole lot of sense to me.  So anything over 55% is eliminated.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My January 2020 Watch List and Purchase

After all that I reduced thousands of companies to 6 stocks:

  • Aflac – AFL
  • Eaton Vance – EV
  • Helmerich & Payne – HP
  • Nucor – NUE
  • Old Republic International – ORI
  • Cardinal Health – CAH

Normally, I would start to look deeper into each and every company to further reduce my options. Sometimes I would look at share buyback charts, reviewing what metrics dropped to allow them to show up on the screen, etc. Instead I am going to do something a bit different. I currently own a position in each of the companies except HP, however, I have watched HP go from $35 to it’s current price of $46 b/c I am involved in a rolling naked put which got away from me. I am not particularly interested in any part of the company at the current time as it’s share price seems to be tied to oil and the turmoil in the middle east.

Currently, I define a lot as a $500 investment, so this month I am going to go in for 2 lots but instead of putting them concentrated on one or two companies I am going to evenly split it up between the remaining five ($200 per company). I would never have considered this if trades weren’t free! This will add to the existing positions, some of which I have had for 5+ years.

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Dividend Investment Portfolio

December 2019 Undervalued Dividend Growth Watch List and Purchase

by Evan

Over the years of screening dividend stocks to purchase, and I do mean years, I have used a lot of methods and tools. Originally, I started by hand pulling up each and every company on Gurufocus and then moving to various screening tools and that I would then cross reference the dividend champion and contender list. However, after a couple of changes to the screeners I was using I was going to relegate myself to going back to the dreadful Gurufocus way of doing things, until I figured out a new fantastic tool – the excel add-on from FinBox.

My metrics aren’t changing yet (they will be Q12020), but with the new tool the screening process took almost no time at all. Within 10 minutes (including installation) I was able to go from about 175 companies that increased their dividend for 20 or more years to 4!

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is part of their DNA and so they’ll continue to do so.  I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price in it of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Over the past few months I found that I was eliminating some otherwise investable stocks just because they were under 35% and that didn’t/doesn’t make a whole lot of sense to me.  So anything over 55% is eliminated.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My December 2019 Watch List and Purchase

After all that I was left with just 4 companies!

PEDividend YieldPayout RatioFree Cash Flow Yield
Nucor Corp.NUE9.112.78%27.05%6.23%
C.H. Robinson WorldwideCHRW15.462.63%41.79%7.46%
Old Republic InternationalORI9.963.56%34.67%10.95%
AFLAC Inc.AFL12.762.04%25.49%13.03%

I have positions in NUE, ORI and AFL already, but CHRW is a new one to me. First, let’s look what they do since I have never heard of them,

C.H. Robinson is an American Fortune 500 provider of multimodal transportation services and third-party logistics (3PL). The company offers freight transportation, transportation management, brokerage and warehousing. It offers truckload, less than truckload, air freight, intermodal, and ocean transportation

From: Wikipedia

Okay, so we have a logistics and trucking company, but why I haven’t I seen them before? Whenever this happens I have found that something has happened with the chart/pricing of the company. Often there is some type of correction or news, and then the company drops in price allowing it to fall in line with my pretty strict metrics. That is exactly what happened here:

Alright, so we have a trucking company that has a 20% drop last month, which leads us to the next inevitable question of – why? As expected they missed earnings which leads to after the fact bear articles coming out (i.e. the quote below was written 10 days or so after that huge drop in pricing…would have been nice if the author could have written it before):

Unfavorable pricing across most service lines due to excess capacity and lackluster demand is hurting the company’s growth. Evidently, revenues declined 7.8% in the first nine months of 2019 due to volume softness. The sluggish freight environment due to the trade-related uncertainty is a huge downside for C.H. Robinson and is affecting its volumes.

In the global forwarding market, the company is witnessing air and ocean volume declines due to soft demand as a result of slowdown in global trade. Amid the weak freight demand, excess truck capacity is weighing on the company’s truckload volumes. With truck pricing expected to be nearly flat in fourth-quarter 2019 and first-quarter 2020, the company anticipates net revenue per shipment to decline year over year through the first half of 2020.

Despite struggling due to the downbeat freight scenario, the company is focused on making investments in technology. Although aimed at long-term growth prospects, the large capital expenses might weigh on C.H. Robinson’s bottom line. This is especially concerning for the company as it is already battling weak earnings due to soft volumes. For 2019, the company anticipates capital expenditures between $65 and $75 million, with the majority to be spent on technology. Its decision to invest $1 billion in technology over the next five years will increase capex further.

Moreover, the frequent management changes at C.H. Robinson do not bode well as far as investors’ confidence in the stock is concerned. In February 2019, C.H. Robinson promoted its current chief operating officer, Robert Biesterfeld, to the position of chief executive officer. Also, Andrew Clarke quit as chief financial officer earlier this year. Mike Zechmeister has replaced him as the new chief financial officer.

Source: Yahoo Finance – Bear of the Day: C.H. Robinson Worldwide, Inc. (CHRW)

I haven’t given much thought to this particular subset of the US Economy, but I don’t possibly see how freight goes down over the long term. Even if we are to see autonomous trucks in the near future (which I really don’t see happening anytime soon (1-5 years), this is the company who is going to own and use them thus seeing the bottom line benefit.

My purchase for this month is going to be 2 lots ($500 = 1 lot at the current time) with this

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