January 2014 10-year YOC CCC Rankings

*photo courtesy of ESPN

I'm trying to do these each month as long as there's interest but I was busy and didn't get to for December.  

You can find previous months by following my Articles label.

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.

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.

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, 39(+4) and 31(+3) 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. After applying this rule the lists dropped to 10, 25, and 27 companies respectively.

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, 11 and 18 respectively.   

Here are the 33 candidates left that may be worthy to do further research on.

Champions

 (click to enlarge)

Contenders

 (click to enlarge)

Challengers

(click to enlarge)

The list I came up with in December had 37 candidates.  It's not surprising that this number has dropped once again as the markets have gone up, which has caused starting yields to go down.

A new company, Helmerich & Payne (HP), is on the Champions list.    They have increased their dividend for 42 straight years!  However, they weren't previously on my list because of a much lower yield.  HP paid out .07 quarterly in 2012 and paid .15, .15, .50, .50 in 2013. They also already declared another increase to .625 payable March 3rd of 2014 with an ex-dividend of Feb 12th.  HP is in the business of contract drilling of oil and gas wells both on and offshore.  I just recently picked up shares of ESV (mentioned here) which has similar services.  However, ESV is all offshore drilling.  Instead of adding to ESV I'm considering 1/2 positions in ESV and HP assuming the research I do on HP checks out.  I think the companies could compliment each other.

COP made the Contenders list.  I own COP and it's at full weight currently but I'd add more if it gets back down to at least 65.

On the challengers list I've already recently added to PM.  Also on the challengers is BAX which I think is at fair value right here.  I haven't considered the company before since I already own both BDX and MDT but I'll be looking into the company more.  BAX does have a higher starting yield which I like.

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