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neskolf2 (73.00)

The Quality Dividend Experiment



May 13, 2010 – Comments (6)

I like to fancy myself a dividend investor.  I don't claim to be a good one.  But dividends are an integral part of my investing strategy, therefore much of my research focus centers around them (I never noticed that the 'C' and 'V' keys were side by side until I nearly admitted to having an 'incesting' strategy.  Yikes!). 

I've found there to be many worthwhile resouces on this site when it comes to dividends and income investing, whether those resources take the form of fellow bloggers (I would surely forget someone if I listed them individually) or general articles.  Of many things that have struck me as I've pored through the advice, insight, and musings provided by these resources, one has been how often stocks with decent, but not necessarily extraordinary, yields are held up as examples of great income investments.  For example, Coca Cola (3.3%) and Proctor and Gamble (PG) are often cited.

Now, don't get me wrong.  These are good yields and an investor could do far worse than to invest in these stalwarts that offer consistent payouts, demonstrated growth, and safe payout ratios.  But the real question, the one I've created this secondary account to answer (What?  You actually thought two separate people would want to name their account neskolf?) is whether or not a dividend investor could do better, both in terms of yield return and performance against the market.  As such, using the Vanguard stock screener and a set of input parameters that I'll describe in brief (or not so brief), I sought to create a basket of stocks with above average yields that would be a market beating portfolio over time.

Here were the qualifications:

Minimum Yield >4% as of the closing price on Monday, May 10, 2010.      At first, I thought that 4% might be setting the bar too low.  But as I thought more about it, it occurred to me that a set of logical, stringent screening criteria, while not eliminating it all together, should mitigate risk to the point where the basket of stocks created would have a risk factor not too much greater than government bonds.  Thus, anticipated return should only have to be marginally better at worst.  A faulty concept?  After reading my other criteria, you tell me because I'm open to being persuaded that I've gone astray.

Price/Earnings (ttm), Price/Sales (ttm), and Debt/Total Equity (mrq) < Industry Average   I'm not beholden to any single ratio being an end-all, be-all measurement for the return potential of a stock.  However, I do think the PE ratio is a nice starting point as to whether or not a stock is reasonably priced as compared to its peers.  And I believe that being below industry average in mutiple ratios covers a broader range of what investors might consider pertinient benchmarks.

Payout Ratio<100%  Even a mediocre dividend investor such as myself will tell you that sustainability is crucial to a quality dividend.  For novice investors, the payout ratio is dividend/earnings.  If the dividend exceeds earnings (creating a ratio in excess of 100%), then the company is funding the payment through sources other than earnings such as debt or cash burn, neither of which can be sustained indefinitely.  Some people get queasy with a payout ratio greater than 50% (and there's nothing wrong with being that conservative), but I don't.  Certain industries will possess relatively high payout ratios (utilities, for example), and therefore I see no reason to disqualify an electric utility with an attractive yield solely on the basis of having a payout ratio of 60%.

Minimum of three years with no missed payments and no cut in dividend     Ideally, I would have liked to take this qualification back to five, or maybe even ten, years.  But to be brutally honest (I always loved that term.  There's something jarring about honesty being brutal), Vanguard's dividend info only goes back three years, and I wasn't about to be arsed with searching out a decade's worth of quarterly dividend payments for  80+ stocks that made it through the initial screen.  Given the economic quakes we've witnessed in the last three years, I think having made it through with an intact or growing dividend during that time span speaks to the ability of these companies to keep paying through thick and thin.

Industry Specific      In spite of my inital screen returning over 80 stocks, I culled out a number based on their industry (i.e. miscellaneous financial services).  Like Buffet (or at least like the Oracle professes), I have to be able to understand how a company makes its money.  Barnes and Noble?  They sell books, supposedly at a profit.  Even I can wrap my brain around that one.  AT&T?  Something about phones or some such.  I use a phone every day.  MLPs?  No idea how they work.  They're out.  Banks?  Well, I know how banks supposedly work.  But I barely trust a bank with the meager funds I keep in my checking account, so they can take a walk. 

So, when all was said and done, I was left with 32 stocks that met all criteria (including the last arbitrary one).  Seven on the list were unratable on CAPS due to size.  That left the twenty five that I have currently green-thumbed.  Now for the disclaimers:

I have done no DD on any of these stocks beyond the screening detailed above.  I repeat, no DD (unless you consider wanting to punch Luke Wilson in the face for appearing in lame AT&T ads a form of DD).  I own no positions in any of the CAPS picks.  I am long on two of the stocks that were not ratable.  This is an experiment and nothing more. My intention is to eventually create and publish worthwhile research on the issues listed in future blog posts roughly following a schedule of whenever the hell I feel like it.

If you've bothered to read this far, you might as well go ahead and tell me what you think.  I'm always looking to find ways to better my investment strategies and endeavors.  And if you have bothered to read this far, thank you.  Best of luck to all.



6 Comments – Post Your Own

#1) On May 13, 2010 at 9:50 PM, rd80 (98.66) wrote:

My guess is your screen results were heavy in utilities, REITs and MLPs.  A lot of good stocks, but most with limited growth prospects.  I'd also expect that if the market turns south or bumps along sideways, this strategy will do well in CAPS.

There are usually two reasons the market doesn't bid up the high yield stocks.  1) There's an expectation the divvy will get cut and/or 2) there isn't a lot of prospect for dividend and/or earnings growth.  By looking for payout ratio, you largely take 1) off the table.

Nothing at all wrong with high yielders with safe dividends. Even if there isn't much growth potential, 4,5 or 6+% can look mighty good when saving accounts yield zip point nada.

BTW, the "earnings and growth rate" tab on CAPS quote page for a stock has bar charts showing the past twelve quarters of earnings, revenues and dividends.  The easiest way I know to get a longer dividend history is Yahoo!'s 'historical prices' page - there's a button there that returns just the dividend history.

Fool On!


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#2) On May 13, 2010 at 10:11 PM, 100ozRound (29.70) wrote:

and with REITs, MLPs and CANROYs, you might want to research the tax implications of the dividends.  You might find your dividend yield eaten away by the particular treatment of the type of dividend.

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#3) On May 14, 2010 at 8:04 AM, neskolf2 (73.00) wrote:

Russ and 100-

Thank you both for taking the time to read and respond.  It's correct that my initial screen was heavily weighted in utilities, REITs and MLPs.  As mentioned, I did eliminate those operations of which I have no understanding.  The initial screen was also fairly heavy in telecoms.  Most didn't make the final cut either due to cap size or due to the lack of quarterly dividend payment schedule. 

Here is the industry breakdown of the 25 that made the cut:

Real Estate Operations (2, 8%)- ADC, RYN

Communications (1, 4%)- T

Electric Utilities (11, 44%)- UIL, POR, AVA, NWE, BKH, XEL, DTE, CPK, PEG, CV, PCG

Natural Gas Utilities (8, 32%)- NI, VVC, ATO, LG, AGL, GAS, WGL, PNY

Printing and Publishing (1, 4%)- CRRC

Specialty Retail (1, 4%)- BKS

Chemical Manufacturing (1, 4%)- OLN

Reviewing the list, I find it interesting that while utilities as a whole dominate, there is not a single water utility that made the list. 

I doubt that this portfolio will rack up the CAPS points produced by those constructed of wisely chosen growth stocks (although, Russ, I agree that this portfolio would be attractive in a down or stagnant market).  My initial intuition is that the accuracy should be fairly high (60-70%) with slow, incremental point gains over time. 

If, in fact, this portfolio succeeds over time, perhaps it will demonstrate that dividend investors can do a bit better than what conventional wisdom dictates.  If not, well, there's always Coca Cola to fall back on.  :)

One last note:  Should one of the picks in the portfolio cut it's dividend (I would hope that the screening process minimized this possibility), it will be immediately removed from the list regardless of performance to date.

Thanks again.  Fool on!

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#4) On May 19, 2010 at 7:02 AM, neskolf2 (73.00) wrote:

I don't intend to update this frequently (maybe every month or so), but I thought an out-of-the-gate review might be worthwhile, even if a seven day sample is not particularly significant (cue Money McBags-like subreference to sampling a hot babe like Lucy Pinder).

The raw numbers:

Score: 45.01

Accuracy: 88%

While I feel pretty good about the accuracy being as high as it is (unless you make a living flying airplanes or performing brain surgery, an 88% hit rate is something to at least feel a little good about), it warrants mentioning that the benchmark index has fallen 3.35% since the initiation of the picks.  This reinforces the notions above that such a portfolio would be attractive in an otherwise unattractive general market.  

Of the 25 picks, six (24%) saw actual price gains from entry point (Just as information, the limit price function was not utilized.  All entry points were genereated by the opening prices on 5/12/2010).  Sixteen (64%) suffered price declines that were not as severe as the decline in the benchmark index.  And three (12%) underperformed a declining broad market.  

The true laggard class is comprised of both real estate operations (RYN, ADC) and a specialty realtor (BKS).  This doesn't surprise me.  Even with the significant weighting, I wouldn't have expected any of the utilities to be at the bottom of the list.  However, I am surprised that a non-utility (CRRC, +6.61) is at the top.

So, are there any true insights to be gleaned?  Not yet.  The portfolio has performed pretty much as expected given the general market climate (decent accuracy and incremental gains spread across the issues).  But it did earn me a sweet pilgrim hat charm!  For some reason, I have a fondness for that particular charm.  It's almost like it's saying, "You may be a nerd, but at least you're good at being a nerd". 

No dividends in the portfolio were reported as cut in the past week.  One dividend was collected: BKH ($0.36).

Disclosure update:  I have initiated a small long position in T in my real life portfolio.

Best of luck, and Fool on!    

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#5) On May 19, 2010 at 9:15 AM, PDTBiotech (93.02) wrote:

Don't know if you're already doing something like this, but you might want to incorporate another website (waiting for lightning bolt from MF) in tracking your experimental ports.  I use - they let you set up multiple ports (I think 10 per ID) with $1M fake money and will track everything for you, including dividend payments.  You can download all of the data into Excel and geek out all you want.  There are other sites you can do this on as well, such as, but I like Marketocracy because it's so easy to load your data into Excel.

I have a lot of experiments going there, one of which is somewhat similar to what you're doing.  Here's my homemade Excel readout from one I set up recently looking at a subset of stocks that have raised their dividends for 10+ years.


The CAPS scoring system is interesting, but this measures performance in cold, hard cash, and once you put together an Excel worksheet to deal with the data you can track everything, like stock appreciation vs. dividend accumulation, etc.  After the port has accumulated a few weeks of data it also calculates turnover for you, breaks your investments down by sector and style, and automatically compares your returns vs. the major benchmark indices, including an annualized return calculation.  And of course you can enter and leave positions as you choose.

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#6) On May 19, 2010 at 10:08 AM, neskolf2 (73.00) wrote:


Thank you very much for the advice and information!  I will absolutely make use of markretocracy's function to expand what I'm doing here. 

It occured to me this morning, that what I really want to do is not necessarily measure this port against the benchmark index (that is useful insofar as it goes).  Rather, I should set up a control port constructed of a similar number of established dividend payers that produce lower yields (i.e. KO, MMM, etc.) and compare the performance of the current port to that.  I could probably do that by setting up a nekolf3 port, but it sounds like marketocracy would make such a comparison experiment less cumbersome to execute.

Thanks again, PDT.  Best of luck to you!

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