March’s High Yield Dividend Champion Portfolio

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments (see the right hand column for a link to the spreadsheet).

Like many of the screens, strategies, and portfolios I track and prefer, this strategy takes a small number of historically relevant ideas, to create a simple, yet powerful action plan for the individual investor. As I have previously detailed,


 

Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.


 
This portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to gauge the “best” high yield/low payout stocks. The list starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

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 The Dividend Champions are the starting point and we begin by ranking the top third highest yielding champions. With the remaining high yielding stocks, we will eliminate 50% with the highest payout ratio. The remaining stocks are assigned a rank based on the ratio of their dividend yield to payout ratio (the same as a trailing earnings/price ratio, or the inverse of the trailing P/E ratio).  Stocks must also have a positive forward projected P/E, to eliminate stocks with no projected earnings for the next year.

The top 10 stocks based on this ratio make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 12 (to limit turnover) and are replaced with the next highest rated stock.


 For March the portfolio sold Questar (STR) at a one month gain of 1.34%.  The proceeds were used to purchase Mercury General (MCY).  MCY currently yields 5.55% and has a payout ratio of 69%.

The simple system I developed to create this portfolio is not without its drawbacks.  When a stock is near the bottom of the rankings for yield or payout,  minor fluctuations in yield or payout could put the stock in or out of the current portfolio each month. In other words, turnover could potentially be a drag on returns.  One potential solution would be to rebalance the portfolio less frequently, or to give stocks more room to fall in rankings before being removed from the portfolio.

The portfolio’s hypothetical current value is $125,620, the beginning balance was $100,000 on December 6th, 2010.

The portfolio’s equity curve is below, plotted against the SPY (distributions included in both):

 

The top 18 rated stocks for the purposes of this portfolio’s criteria are listed below:

Name Ticker Yield Payout E/P
Pitney Bowes Inc. PBI 8.27 49.18 0.1682
Community Trust Banc. CTBI 4.02 49.01 0.0820
Mercury General Corp. MCY 5.69 69.91 0.0814
Tompkins Financial Corp. TMP 3.50 45.00 0.0779
Universal Corp. UVV 4.27 59.39 0.0718
Eagle Financial Services EFSI 3.80 54.96 0.0692
Sysco Corp. SYY 3.67 55.38 0.0663
Sonoco Products Co. SON 3.53 54.46 0.0649
PepsiCo Inc. PEP 3.42 53.35 0.0640
RPM International Inc. RPM 3.60 56.58 0.0637
MGE Energy Inc. MGEE 3.49 55.65 0.0627
Consolidated Edison ED 4.17 67.79 0.0614
Clorox Company CLX 3.55 58.54 0.0606
Questar Corp. STR 3.38 56.03 0.0604
Nucor Corp. NUE 3.35 59.59 0.0563
Johnson & Johnson JNJ 3.50 65.33 0.0536
Abbott Laboratories ABT 3.60 67.77 0.0532
California Water Service CWT 3.28 64.29 0.0510