It has been a few months since I stopped screening for, and purchasing monthly lots of undervalued dividend growth stocks. Well I am jumping back in next month and I am extremely excited to get this part of my financial world started up again.
Why I Stopped Dividend Growth Value Investing?
Last year, I started to sell naked puts to generate revenue. The idea was simple enough, I would sell puts on companies that I would not mind owning. If the put did not get assigned to me, I would keep the cash and if the put was likely to (or did get assigned) to me I would keep the stock and sell covered calls until it was a profitable trade. I gave myself some very specific rules as to not take too much risk. Well…a couple of those positions turned on me and I ended up owning some relatively large lots of companies I didn’t particularly want mostly on margin. It felt irresponsible to keep buying stocks when the portfolio had that much debt, and as such, I was forced to put a hold on buying undervalued dividend growth stocks,
I am not giving up! This my favorite part of my personal finance world. I really believe buying blue chip type stocks that have a bit of room to grow and a long term view on dividends is the best way to building wealth in the market. Notwithstanding, I have put myself in a position where that has to be put on hold for a few months until I can roll out of my current positions.
I have talked about reducing the risk with naked puts in the past few months, and I think the easiest way to do that is to start with certain criteria for the stocks that I may sell naked puts on (e.g. they pay a dividend or are otherwise part of a dividend growth list). This way, even if I am in the middle of a shitty downturn on the stock I may not be as annoyed as I am today.
So as soon as I roll out of a few bad positions I am going to 1000% come back to my process of buying undervalued dividend growth stocks.
After a 6 month hiatus, I am jumping back into the waters in September. While I am worried about valuation of the market in general as indicated by my recent 401(k) reallocation post based on the Shiller PE, I think the process below my insulate individual holdings because of how they are currently valued compared to my purchase price. Obviously, Mr. Market can take anything down it wants, but that is a risk I am willing to take over the next few decades.
Will I Continue to Trade Options?
Absolutely. I have learned some pretty cool techniques beyond the basic covered call and short put including:
Notwithstanding, what I need to do is actually follow my own rules to limit risks when it comes to selling naked puts.
Re-engineering My Dividend Undervalued Stock Screen
Price is what you pay, value is what you get – Warren E. Buffett
Since I am re-starting the process, I figured it would be a good time to look at what I was doing for years and determine whether I’d like to change my screen. Previously, I would load up MorningStar in one tab and then opened up the stats of EVERY company that has increased their dividend for the past 20 years using the Dividend Champions and Contenders list. I would then hand screen for:
- Price to earnings for the company vs industry
- Operating margin for the company vs industry
- Price to book for the company vs industry
- Dividend Yield
- Payout ratio (added later)
- Market cap (added later)
The process took probably an hour or two, but I figured if I was spending $500 to $750 on a consumer item I would give it the same amount of scrutiny so why not a piece of a business that I am likely to hold for years.
So what am I keeping the same and what am I changing? First and probably the least important piece of the puzzle I will be using Guru Focus instead of Morningstar, since it seems that in the 6 months since I have taken off Morningstar changed their format and it looks like it will lengthen the time of this already lengthy process.
My process in the future will be:
- Remove any company that hasn’t increase their dividend at least 20 years. I want a company that continued to take care of their shareholders during the 08-09 crash
- Then, let’s remove any company that isn’t worth at least $500,000,000 (remove microcap stocks)
- Next, I am going to knock out any company whose P/E is over 20.
- Next, I am going to remove any company whose Shiller P/E is over 20
- Next, I am going to remove any company whose Operating Margin is less than their Industry Average
- Next, we are going to remove any companies whose dividend yield is less than 2%
- Lastly, I am going to remove those companies whose payout ratio is over 60%
Once I have remaining companies, I will then apply them against their 52 week high and low. I have a particular theory that I want to buy closer to the 52 week low since after the above 7 steps if the stock is still priced low compared to where it once was it has a certain amount of additional safety built in.
Are there any metrics you like to use? This isn’t set in stone and I am happy to further the screen!