October 2016 Undervalued Dividend Growth Watch List

by Evan

Every month I take those stocks that have increased their dividends for 20+ years and manually screen them to create a watch list for my monthly purchase.  My goal is to find possibly undervalued companies that have paid an increasing dividend for two or more decades.  Even before the arduous task I knew that my watch list was going to be short, with the broad market at an all time high it has to mean that price to earnings ratios will be high and yields will be low.  Having a short list doesn’t bother me at all – it just makes it easier to choose my lot to buy this month.

Applying my Valuation Metrics to Dividend Growth Stocks

All my data comes from a snap shot in time (I did the research on the night of October 10, 2016) and all metrics come from Morningstar.com. Warning: This, along with every other screen, is a snapshot in time, and as such, you can’t really rely on it.  Rather, the screen should be used just as a starting point for your own research.

Price to Earnings Elimination

First, I eliminate all those stocks with Price to Earnings ratio of 20+ or higher than the individual company’s industrial average.   “Price to Earnings” is defined as,

The Price/Earnings Ratio or P/E Ratio is a stock’s current price divided by the company’s trailing 12-month earnings per share from continuous operations.

A fund’s price/earnings ratio can act as a gauge of the fund’s investment strategy in the current market climate, and whether it has a value or growth orientation

This particular month applying this screen I went from 156 equities to 39!

Operating Margin Elimination

My next screen is eliminating those companies whose Operating Margin is less than their Industry’s average.  Operating Margin is defined as,

a margin ratio used to measure a company’s pricing strategy and operating efficiency.

Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc.


Operating margin gives analysts an idea of how much a company makes interest and taxes on each dollar of sales. Generally speaking, the higher a company’s operating margin is, the better off the company is. If a company’s margin is increasing, it is earning more per dollar of sales.

This particular month I went from 39 remaining equities to 32:

Price to Book Elimination

Third on the list is eliminating those stocks with a Price to Book ratio of above 4 (or if above 4 in line with the industry average).  Price to Book is defined as,

price-to-book ratio (P/B Ratio) is a ratio used to compare a stock’s market value to its book value.


A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company


This took us down to 25:

Yield Elimination

I am not chasing yield, but at the same time, I want to be paid for owning the company – this month I chose 2.0% (same as the past few months).  This brought us down to 17 Companies.

Payout Ratio

Last, but certainly not least, we have the payout ratio.  I do not want to buy into a company whose dividend could be in jeopardy because they are paying too much of their free cash flow to the owners.  The payout ratio for the trailing twelve months has to be under 60%.  This got us down 12 companies:

Dividend Growth Stock Watch List October 2016

The above screen (which I did by hand) leaves me with the following stocks to watch

  • AFLAC Inc. AFL
  • Chesapeake Financial Shares CPKF
  • Community Trust Banc. CTBI
  • Eagle Financial Services EFSI
  • First Financial Corp. THFF
  • Franklin Resources BEN
  • Old Republic International ORI
  • T. Rowe Price Group TROW
  • Target Corp. TGT
  • UGI Corp. UGI
  • Wal-Mart Stores Inc. WMT
  • Northeast Indiana Bancorp NIDB

I then compare these companies’ current price with their 52 week high and low.  I don’t always follow it, but I like the idea that there is a built in additional safety buying closer to the 52 week low.

Anyone like a particular company in the list?

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John October 11, 2016 - 7:10 am

I prefer AFL, TGT, and WMT on the list and have buying shares each month as my budget allows.

Evan October 11, 2016 - 8:49 am

Funny you mentioned those 3 – AFL was my Sept purchase and I bought lots of TGT and WMT earlier in the year. I am going to take a look over the next few days, but I am leaning with adding to a different position than those 3 despite the numbers.

Kelly October 12, 2016 - 3:26 pm

Can you tell me a little more about your AFL Sept purchase? They have showed up on my list for over a year and I never pick it. I’m thinking about it for my Nov pick but I know they are in Japan heavily I’m not sure if that is good or not. Some stocks that do not fall into my filters but I am further researching for Nov as well are HRL (for growth but hesitate because of p/e) ADM, KMB,ACN, would love to get ABT in there but the p/e is so high. The other one that was on my list forever was TMP and it was always on it’s 52 week high so I never went for it and the high just keeps getting higher (face palm). Anything strike you about those?

Evan October 12, 2016 - 3:48 pm

Thank you for stopping by! They are massive in Japan which may give you some international exposure which isn’t a bad thing. When I purchased AFL it had the following metrics:

A P/E of 11.9 vs 13.5 industry average
Operating margin of 18.5% vs 9.8 industry average
Price to Book of 1.3 vs 1.1 industry average
Yield of 227%
Payout Ratio of 26.6%

So all good on that front. It was close to its 52 week high, which I don’t like purchasing at or near, but I wanted some exposure to the insurance market.

How do you create your screen?

Kelly October 12, 2016 - 4:06 pm

Similar to you, I use the dividend champion list from David Fish and I run 2+% yield, p/e under 20 and payout under 60 and dividend growth rate over 5, 10 years between 6-12%, then sometimes I play with a lower yield to see if I can get something quality with growth (HRL). Of course I know right away what I already own (not much only 2 year in) and what sectors I already have or don’t want. Then I add it to my list to watch. I only have enough capital to buy one choice every other month. So it gives me time to research but things change a lot too. Sometimes stocks drop and I’m like “I wish I had money right now”!
The one thing I’m having trouble with is I want to know exactly when David Fish updates his list because I feel like I’m not accurate depending on where I am in the month. Usually after run my filters not much is appealing and I am still always learning.
A quick snapshot of my stocks are JNJ, EMR, MMM, MO, AVA, NEE, PM, V, DIS, GWW

DivHut October 30, 2016 - 10:15 pm

Nice list of stocks your screen produced. AFL probably comes up the most as it has been a fairly valued good yielding stock for along time. Nice to see TROW and ORI making the cut. ORI has been on my watch list for a very long time and I’d like to pull the trigger on that name one day.


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