Dividend yields, payout ratios, earnings growth estimates, the valuation of a stock and stock price performance are the most important parameters to study while creating your dividend portfolio.
Dividend investing is synonymous to an age group over 40 who want less risk and a steady income. However, age groups below 40 can also create their own dividend portfolios by screening stocks in a certain way, which we’ll discuss below.
Income Portfolio
This is the traditional dividend portfolio that a dividend investor creates and is a very conservative approach to screening stocks.
| Relative Strength - Off 52-Week High | 0% to -10% |
|---|---|
| Dividend Yields in % | 2% to 4% |
| Payout Ratios | > 50% |
| Earnings Growth Estimates | 2% to 10% |
| Valuation (P/E) | 15 to 20 |
If the above screening approach is followed, an investor will screen out top dividend stocks that are doing well on price performance by being very near their 52-week highs with yields slightly above Dow 30 or the S&P 500, payout ratios that distribute a majority of their earnings to the investor and re-invest very little to grow, and single digit earnings growth estimates which mean the stock isn’t treated as a growth stock by investors and, hence, could have a lower beta than most other high growth stocks.
Example:
- Altria (MO ) – Altria is one stock that meets all of these criteria as of today. It’s off only 4% from its 52-week high and has a 2016 payout ratio of 74%. It trades at a forward PE of 20, while having single digit 2017 growth estimates at 8.88% according to analysts’ expectations.
- 3M (MMM ) – This manufacturing behemoth also meets the screeners we set above. It yields 2.6% and has single digit growth estimates at 7.84% for next year. It has a payout ratio of more than 50% based on 2016 earnings and is trading near its 52-week high.
Steady Growth Portfolio
| Relative Strength | > -10% |
|---|---|
| Dividend Yields in % | <2% |
| Payout Ratios | <50% |
| Earnings Growth Estimates | 2% to 20% |
| Valuation (P/E) | <15 |
A steady growth portfolio is a hybrid portfolio that aims to capture both stock price appreciation and dividends. A reasonable estimate to screen such stocks would be buying them when they dip more than 10% and have yields lower than the Dow or the S&P 500. These stocks re-invest a majority of their earnings as they see growth opportunities ahead and have slightly higher growth expectations in double digits. The most important metric for a growth portfolio is, however, its valuation. For stocks to give a price appreciation, they need to be undervalued, hence, a reasonable level would be to shortlist stocks that have a PE less than 15.
This list might feature a lot of new dividend initiators.
Example: Anthem Inc. Liquid error: internal initiated a dividend in 2014 and currently yields 1.77% with a payout ratio of 23% based on 2016 earnings estimates of $10.94. It’s currently off more than 15% from its 52-week high and trades at a PE of 13. The company is expected to give double digit earnings growth at 10% for 2017. Considering its numbers, Anthem may be a candidate for a growth portfolio that pays a dividend.
Aggressive Dividend Portfolio
| Relative Strength | -20% to -30% |
|---|---|
| Dividend Yields in % | >4% |
| Payout Ratios | >100% or <100% |
| Earnings Growth Estimates | >30% |
| Valuation (P/E) | >30 |
An aggressive dividend portfolio is one where the yields may be extremely high due to stock prices falling down quite heavily. Oil & gas stocks are a perfect example in today’s market. These stocks may be bordering a dividend trap, but would show extremely high earnings estimates as the sector they represent might be in a cyclical downturn.
Chevron (CVX ) is a classic example in today’s markets to be an aggressive buy. The stock yields more than 4%, has a PE of 72, a PE ratio of more than 300% based on 2016 earnings estimates and the company is expected to give triple digit growth estimates at more than 200% based on the analysts’ estimates we are getting. The company may be burning through cash right now as it pays its dividend, but if the estimates going forward turn into reality the fortunes of the company could reverse fast, thus, impacting positively on the share price.
Aggressive dividend portfolios could also include stocks with negative payout ratios like ConocoPhillips (COP ). COP has a 2016 earnings estimate of -$1.69 and, yet, the company pays a dividend of $1 per share, which results in a 2% yield. 2017 estimates point to a turnaround as earnings are likely to be at $1 per share. With no earnings and a dividend payout, it results in a negative payout ratio of -59%.
*The above screener only serves as a guide. Actual ranges may vary from investor to investor, depending upon his/her risk tolerance.
*All financial numbers as of May 6th 2016.
