Dividend Tactics Stock Scores (DT Scores)
Determining which stocks to hold within a dividend investment portfolio is one of the most critical, and one of the most difficult tasks to conduct for an investor. A safe and reasonably good starting point are the dividend aristocrats; however, this list does not necessarily include companies within each sector, not to mention it only includes companies listed on the S&P 500.
To help guide myself in the selection of stable, healthy dividend stocks to include within my portfolio I have developed a scoring system that I have penned “Dividend Tactics Score” or DT Score for short.
A stocks’ DT Score is a summation of how the company scores in ten key areas, with a maximum score of 100 in each area for a maximum DT Score available of 1000. My goal in establishing these ten key areas was to avoid anything that could be affected by how the market values a company, and instead focus on fundamental information about a company – information readily available online to the average investor. In addition, I built my scoring system in a way to make both large and small companies be equally assessed. (Using percentages rather than total figures)
To evaluate the effectiveness of this scoring system I have developed a chart comparing the current score to 5 Year Total return for nearly 60 companies. What it shows is that companies with lower DT scores tend to have greater variation in overall returns. It also shows that while high returns can be achieved by both high scoring and low scoring companies, the really low returns are only seen by the lower scoring companies. As a dividend investor with a long term outlook, it makes a great deal of sense to focus on holding companies within my portfolio with higher DT scores rather than those with lower scores to minimize risk exposure without sacrificing upside potential.
The ten key areas are as follows:
1. Dividend Yield
The scoring for dividend yield is simply the current yield x 10, with a maximum score in this category given to a stock with a yield of 10% = 100 points. Yields greater than 10% do not get additional points. It is important to note here that while high dividend paying companies may score well in this one category, if they are poorly managed or have otherwise weak fundamentals they will likely fall short in others, and in contrast, well managed and stable companies with relatively low yields may not earn a high score here but will be rewarding in the remaining categories.
2. 5 Year Dividend Growth Rate
The same calculation used for yield is repeated here. 10% annual dividend growth rate over 5 years earns 100 points. 0% growth or less gets a score of 0.
3. Dividend Payout Ratio
After some thought, I came up with a modified dividend payout ratio calculation where I dividend the annual dividends paid by a company over the trailing twelve months revenue to establish a percentage of the total revenue a company makes is allocated to the payment of dividends. A lower score here gets higher points – If a company’s payout ratio is 75% they get 25 points; a company with a payout ratio of 25% would get 75 points. It would be impossible for a dividend paying company to actually achieve the maximum 100 points here.
4. Cash Available to Pay Dividends
This is an interesting category – I took the amount of cash and cash equivalent assets a company currently has and divided by the annual dividend to calculate how many years of dividend payments they can make with their current cash assets. 10 points per year of cash to pay dividends is awarded with 100 points going to the few companies with enough cash to pay dividends for ten or more years.
5. Book Value
Companies with greater market breadth have greater opportunity to spread risk across multiple geographic areas and markets. Rather than consider market capitalization which is tied to how the market values a company, I have decided to award 1 point per $1M of book value (Company Assets minus Company Debt), with a maximum of 100 points going to companies with $100M or higher book value.
6. Profit Margin
The better margins a company can establish goes hand in hand with brand value, resilience to market fluctuations and position within the marketplace. I calculate a company’s profit margin by taking dividend their profit over their revenue for the trailing twelve months and this generates a percentage of revenue that remains as profit. This percentage equates to the score the company receives in this category with higher profit margins earning higher scores.
7. Debt to Asset Ratio
In this category I simply take the companies debt and divide that by the company’s assets to get a debt to asset ratio percentage. Just like with the dividend payout ratio calculation, the lower the percentage the higher the points awarded.
8. Revenue to Total Assets Value
I consider this an efficiency score – if a company can generate large revenue from a relatively smaller asset base, than this indicates that they are efficient in the generation of income. In contrast, companies that generate the same revenue from a larger asset base (typically companies with significant infrastructure to maintain) are not able to generate income as efficiently. A higher percentage here would indicate that a company can increase revenue on smaller capital infrastructure investments than those with lower percentages. Points awarded are 1 point per percent, to a maximum of 100.
9. Years of Operation
Companies that have been around longer typically have better brand value, market position and intellectual assets than those who are newer. 1 point is awarded for every year of operation to a maximum of 100 years = 100 points.
10. Years of Uninterrupted Dividends
A company who prides itself on never missing a dividend payment is less likely to do so than a company that does not. 1 point is awarded for every year of uninterrupted dividend payments, to a maximum of 100 years = 100 points.
Here is a list of the companies included in my assessment and their respective DT Score, based on data available in Aug 2013:
|Company||Symbol||Sector||DT Score||5 Year Total Return|
|Johnson and Johnson||JNJ||Healthcare||607||7.6%|
|Proctor & Gamble||PG||Consumer Staples||604||5.7%|
|Intel Corporation||INTC||Information Technology||571||1.6%|
|Emerson Electric Co||EMR||Industrials||568||7.1%|
|Sherwin-Williams||SHW||Mining and Materials||562||26.3%|
|Kimberly Clark||KMB||Consumer Staples||544||12.8%|
|Bell Canada Enterprises||BCE||Telecommunications||532||4.9%|
|Air Products & Chemicals||APD||Mining and Materials||516||5.5%|
|Bank of Montreal||BMO||Financials||508||9.7%|
|Thomson Reuters||TRI||Information Technology||507||2.3%|
|DuPont||DD||Mining and Materials||484||8.5%|
|Canadian Pacific Railway||CP||Industrials||484||14.5%|
|Methanex Corp||MX||Mining and Materials||467||13.8%|
|Russel Metals||RUS||Mining and Materials||466||1.5%|
|Tim Hortons||THI||Consumer Discretionary||462||14.6%|
|Automatic Data Processing||ADP||Information Technology||459||12.2%|
|Southern Copper Corp||SCCO||Mining and Materials||441||10.3%|
|Cameco||CCO||Mining and Materials||439||-8.9%|
|Corus Entertainment||CJR||Consumer Discretionary||402||7.8%|
|Canadian Oil Sands||COS||Energy||389||-9.6%|
|Riocan REIT||REI||Real Estate||377||8.7%|
|Dundee REIT||D||Real Estate||354||4.9%|
|Allied Properties REIT||AP||Real Estate||346||13.7%|
|Medical Facilities Corp||DR||Healthcare||309||19.1%|
|Boston Pizza||BPF||Consumer Discretionary||284||20.5%|
|The Keg||KEG||Consumer Discretionary||284||16.2%|
|Brookfield Renewable Power||BEP||Utilities||260||12.7%|
|California Water Services||CWT||Utilities||256||5.2%|
|Innergex Renewable Energy||INE||Utilities||214||5.1%|