April 2014 10-Year YOC CCC Rankings

*photo courtesy of ESPN

Well, it's time for another month of my CCC rankings by 10-year YOC.

What I Did

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.

Why I Did It

The purpose of this screening process will be to identify 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.

How I Did It

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 17(-1), 31(-6) and 41(+1) 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. 

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 5(+1), 8(-3) and 29 (+3) respectively.   

My Results

Here are the 42 candidates left that may be worthy to do further research on.  

Champions

 (click to enlarge)

Contenders

 (click to enlarge)

Challengers

(click to enlarge)

The total list size went up by 1 from last month.

On the Champions list, Target and WMT were removed.  The price of TGT stock has gone up a little so this isn't a big surprise.  Also a couple of new additions are added, FDO and MO.  I need to look into FDO more.

There are no new stocks on the contenders list but 3 were dropped probably due to price increase.  These were LMT, WEC and NU.

The Challengers list is by far the largest, having 29 stocks.  I own PM and TGH on this list.

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

You can find previous months by following my CCC Rankings label.