When picking stocks there is no such thing as a 'sure thing.' All stocks carry risk and uncertainties. However, there are metrics we can look at that help us to reduce our portfolio's risk by selecting high-quality stocks.
In search for 5-Star stocks, here are the metrics I look at:
1. Valuation
I look at five measures of fair value: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price, 4.) Graham Number and 5.) NPV MMA Price. Of the first four, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. Then I weight it with the NPV MMA Price to determine the calculated fair value. (More Info) A Star is awarded if the stock is trading at a fair value.2. Free Cash Flow Payout
Dividends are paid in cash, not earnings, FFO, EBIT, EBITDA or EPS. To pay a meaningful dividend a company must generate sufficient free cash flow. A Star is awarded if the Free Cash Flow Payout is less than 60% and there were no negative free cash flows during the last 10 years.3. Debt To Total Capital
If a company generates significant cash, it may still be hampered to pay a meaningful dividend if the cash must be used to pay down debt. Having less debt provides a company more financial flexibility. A Star is awarded if the Debt To Total Capital is less than 45%.4. NPV MMA Diff
The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. We must always consider if there are better/safer options. A Star is added an amount in excess of the target amount.5. Key Metrics
"Dividend Growth Rate", "Years of Div. Growth", "Rolling 4-yr Div. > 15%" and "Years to >MMA" are considered Key Metrics. I have found that great dividend growth companies have scored well in each of these metrics. A Star is awarded if 2 of the 4 Key Metrics are true.A 5-Star Dividend Stock scores well in each of these metrics. This week, I screened my dividend growth stocks database for select 5-Star stocks with a yield of 2.5% or more. The results are presented below:
T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with June 30 AUM of $776.6 billion.The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 33 consecutive years. Yield: 2.6%
Prosperity Bancshares Inc. (PB) owns Prosperity Bank, which provides financial products and services to small and medium-sized businesses and consumers. The company has paid a cash dividend to shareholders every year since 1999 and has increased its dividend payments for 20 consecutive years. Yield: 3.2%
MEC Industrial Direct (MSM) is a direct marketer that offers a range of industrial products to customers throughout the U.S.; it focuses on maintenance, repair and operations (MRO) supplies. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 17 consecutive years. Yield: 4.4%
Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc., which provides commercial banking services in Kentucky, Tennessee and West Virginia; and a trust company. The company has paid a cash dividend to shareholders every year since 1988 and has increased its dividend payments for 40 consecutive years. Yield: 4.6%
Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 32 consecutive years. Yield: 5.5%
As with past screens, the data presented above is in its raw form. Some of the companies would be disqualified for poor business fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 150+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long CTBI, MCY,
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Tags: TROW, PB, MSM, CTBI, MCY,
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