How we Select our Top 100 Dividend Stocks

“If you apply a price-to-dividend ratio analysis to stocks you are thinking of purchasing or already own, you can purchase, or reinvest, cash at optimal points in time. If Pepsi’s share price falls and the yield nears 4 percent, the investor could then time his or her purchases in the most efficient manner and gain the most shares of Pepsi stock possible. Following this type of market timing will allow an investor to collect more share of a company’s stock at the times when it is most undervalued”.      Timothy J. McIntosh,  The Snowball Effect

Selection Criteria; 

  1. We select those firms that have an above average dividend yield based upon a firm’s price and dividend history, or a low price-to-dividend ratio.  Those firms that trade at above average historical yields offer investors the opportunity for increased appreciation through additional share accumulation and dividend reinvestment. Those firms trading at the low end of their own historical average dividend yield will not be considered for placement in the Top 100 Dividend Stock List.
  2. We select those firms that have a solid history of consistent dividend payments plus above-average dividend growth.  We generally seek a minimum 3% dividend growth rate for prospective companies and a minimum 1% yield.  As I mentioned in the Pepsi example, it is the compounding effect of dividend payments plus the rate of dividend growth that ultimately enriches investors.
  3. We select those firms trading at low historical price/earnings versus their own history.  We also utilize a secondary valuation methodology. The choice between an additional valuation metric will be based upon the firm’s industry (i.e. using price/book for financials or price/FFO for REITs)
  4. We select those stocks that maintain low volatility, or beta. Our thesis for choosing low beta stocks is not just due to preserving capital, but also due to the low-volatility anomaly. In examining the universe of available equities, the least volatile 20% – 30% of the investment stock universe tends to outperform the remaining 70% – 80% in most market cycles.
  5. We select firms that maintain a strong financial rating from S&P.

Our team at the thedividendmanager.com began with a long list (more than 450 companies) and gradually narrowed it down to our favorite 100 large-cap dividend companies. You’ll find them all on our Top 100 page and regularly updated on our website. Each company is ranked in its industry (category) based upon those factors listed above; dividend yield, dividend growth, P/E ratio, financial rating, and beta. We consider these five criteria to be the best way to evaluate dividend-paying firms. We also examine a firm’s P/S or P/B or P/FFO ratio as well as the historical range.

Dividend yield analysis is also a critical factor. A firm trading at a high dividend yield versus its own historical yield spread will be more highly valued within the Top 100. Secondary consideration will also be given to a firm’s return on equity, debt equity, and operating margins. Firms with the highest ranking in each industry earn the lowest score. We generally include at least 6 companies from each of the eleven major sectors.  Here is a sample of a recent update on Public Storage, the largest REIT in the country with a near 4% yield;

Analysis of Public Storage is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 3.85% 68
Dividend Growth (3-6 year avg) 14% 140
Forward P/E 16.76 196
S&P Financial Rating A 120
Beta 0.75 75
Total Score 599

Additional Criteria Considered;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate FFO 2016 P/FFO Ratio 10 yr P/FFO Low 10 yr P/FFO High 5 yr max Yield % 5 yr lowest Yield %
3.85% 12.4% 15.7% 9.65 21.15 13.9 29.9 3.95% 2.48%

Final Analysis (Quantitative);

Positives;

  • Public Storage’s current dividend yield (3.85%) is at the top end of its five-year average historical dividend yield.
  • Public Storage’s dividend yield is well above that of the S&P 500 Index.
  • Public Storage maintains an impressive 3 year dividend growth rate of 12.4%.
  • Public Storage has paid out a dividend consecutively for the past 23 years.
  • Public Storage maintains a beta of 0.75, far lower than the average company.
  • Public Storage maintains an excellent credit rating; A. This is investment grade.

Negatives;

  • Occupancy rates are at premium levels and real estate pricing for developing new storage facilities is more costly, which may effect future margins.

 

As a dividend investor can see from our initial analysis, strong consideration was given to Public Storage’s FFO as well as its FFO trading history. The fact that its dividend yield was at its highest historical level placed Public Storage allowed our team to place the stock within the top 10% of our ranking system. We add additional commentary on each stock on its latest earnings release, future prospects for growth, and other qualitative data.

When putting together this list, we also placed a great deal of focus on diversification. Astute investors must be sure to spread their funds among different sectors of the economy and different parts of the world. Many of the firms on the list are international companies, but you can find them on US exchanges as American depository receipts (ADRs).

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