Thursday, May 11, 2017

My System for Stock Selection

Greetings, thanks for stopping by.

Some time ago, I shared my saving system, on how I end up with money every week to invest. Now, I want to show the other side of that process, how I decide what to invest in, once the money makes its way to my brokerage account.

I'll focus here on stocks, and not get into ETFs.

This is by no means a complex, sophisticated method. This is just what I've developed from the last few years of investing, and especially the last year or so of Dividend Growth Investing.

This process will start with me just hearing of a certain company, from various sources: other investors, blogs, financial website articles, and other things. Once I become interested in a certain company, I will then start gathering info on it, en route to adding it to my Google Sheets spreadsheet. I will have 2 tabs involved in this process, one labeled "Prospects" for companies I am thinking about starting a position with, and then another labeled "Holdings" which are existing positions which I analyze to see if I want to add to those positions.

External Values

I start off with values that the spreadsheet cannot provide, either by lookup or calculation. These include:
  • Annual Dividend []
  • Yield History []
  • Shiller PE Ratio []
  • Median Shiller PE over last 10+ yrs []
  • Industry Shiller PE ration []
  • Morningstar Fair Value (when available) [ Premium]
  • PE 10 year average []
  • PE Industry []
  • Annual EPS Growth over last 5 yrs []
  • 3-year Dividend Growth Rate (DGR) []
  • Payout Ratio []
  • Years of Consecutive Annual Dividend Raises []
I do pay for Morningstar Premium, but all other resources are free.

I use the common P/E ratio, but also use the Shiller P/E ratio as it is less impacted by sudden short term shifts in earnings numbers, as it uses the average earnings over the last 10 yrs, adjusted for inflation.

For each of these items, I will look these up from a separate website (shown in the brackets)

Google Sheets Formulas/Calculations

Then I will use the Google Sheets formulas for the following key calculations:

  • Price [pulled by Google Sheets]
  • EPS [pulled by Google Sheets]
  • Yield [Annual Dividend / Price]
  • P/E Ratio [pulled by Google Sheets]
  • Fair Value (based on Shiller PE) =
[Price/((Shiller PE)/minimum(Historical Shiller PE, Industry Shiller PE))]

  • Average Fair Value =
[Average of all Fair Values provided in the spreadsheet]

  • Target Price =
[0.9*Avg Fair Value]

  • Modified Dividend Discount Model Fair Value = 
[Annual Dividend * (1+ min(EPS Growth Rate, DGR))/Yield]

  • Fair Value (based on P/E Ratio) =
[Price/(PE/minimum(Historical PE, Industry PE)]

  • Minimum(5 yr EPS Annual Growth Rate, 3 yr DGR)
  • Chowder# =
[Yield + DGR (Dividend Growth Rate)]

  • Beta [pulled by Google Sheets]
Now these are by no means complex valuation formulas, as you can tell. I wanted to keep it simple, using mostly the commonly available ratios to give me an idea that a certain stock may be fairly valued, or undervalued. I am basically comparing P/E ratios to their historical average, and the average for that particular industry. I am of the belief, that using this method, it gives you a general idea that the particular stock is likely to be undervalued if the price falls below the calculated target price. 


Also I use Google Sheets to provide rankings of various parameters. They have a nice :RANK" function which can provide rankings in both direction for any set of values. I rank the following items for each stock:

  • Shiller PE Valuation Ratio:
[Shiller PE/minimum(Shiller historical PE, Industry Shiller PE)]
  • Growth Rank (relative rank of minimum of EPS 5 yr growth rate and 3 yr DGR)
  • Chowder Rank (relative rank of the Chowder Number)
  • Beta
  • Yield
  • Payout Ratio
  • Dividend Raise Streak
  • Average of all rankings
I will then average all rankings to come up with a Total Rank number. From there I will rank the Total Rank Number, and then sort by that ranking. So the higher it shows up in my spreadsheet, the more that particular stock "ticks the boxes" of various parameters which make for an attractive position to start, or one to add to.

Conditional Formatting

I will also have conditional formatting to highlight the average fair value, when it is higher than the current price. Also as part of the conditional formatting, it will highlight the target price when it is higher than the current price. After everything is ranked, I look for stocks that have the target price highlighted, to show me that there is at least a little bit of margin of safety. See example below:


I can also use filtering in the spreadsheet to limit certain criteria (ie Payout Ratio less than 70%, Yield over 2.5%, etc)


Of course, I use these rankings as a guide, as nothing is absolute here. It simplifies the comparison among the many companies on the spreadsheet, but in the end, I need to look at each potential holding qualitatively, determining whether it is a company I want to invest in, taking into account their prospects for the future, and whether it is a viable business that will be around long term.

So each week, I review this spreadsheet, update the sorting by Total Rank, to see which stocks rate the highest, and those I give serious consideration for the next Friday Buy-Day (for those unaware, I purchase stocks every Friday in my Robinhood Account, and do not pay a commission).

Ultimately, the decision is a qualitative one that I make, after reviewing what the spreadsheet spits out. Truth be told, the spreadsheet has become somewhat of a monster at this point (90 rows, and columns out to "AQ"), but one that I enjoy reviewing before making any stock buys.

Thanks for spending some time here. Have you developed a system to help you identify your next stock purchase(s), or have thoughts on my system? Let me know in the comments!

Sunday, April 30, 2017

April 2017 Dividends

Hello everyone,

So all my April 2017 dividends are in, and there actually a couple days left in April, so I figured it would be good to get a jump on my dividend report.

Taxable Accounts
Walmart (WMT) - $1.53
Cardinal Health (CAH) - $7.18
Prospect Capital (PSEC) - $20.20
Cisco Systems (CSCO) - $11.02
New Residential (NRZ) - $18.72

Taxable Account Total: $58.65

Roth IRA Account
Cardinal Health (CAH) - $5.91

Roth IRA Account Total: $5.91

Overall Dividend Income for April 2017: $64.56

Forward 12-month Projected Dividend Income: $1,732.35

My April Buys:
Cardinal Health (CAH) - 6 shares
CVS Health (CVS) - 6 shares
Lazard Ltd (LAZ) - 2 shares
Qualcomm (QCOM) - 3 shares
VF Corporation (VFC) - 9 shares
Williams-Sonoma (WSM) - 6 shares
W.W. Grainger (GWW) - 1 share

For April I decided to take advantage of some pullbacks to either start or add to some positions. I also received my yearly bonus at the end of March, so I put that money to work in April to give that dividend train a little more fuel!

The fiance and I haven't started our joint account to save for the 2018 wedding yet, so in the meantime, I figured I'd load up on the DGI holdings, while I can. Though not ideal, if we need to, we can draw from it later. We're hoping we won't need to.

Going forward to May, I am interested in adding to my positions of GWW, QCOM, and CVS. I also have my eye on ABBV (Abbvie) as a potential new position for May

My Thoughts on the Month:
I can't sugarcoat it, April is part of my leanest group of months for the year (January, April, July, October).

My portfolio is not well-balanced in dividend payout timing across the months of the year. They are mainly stacked for the March, June, September, and December payouts. In these months I should be approaching, if not exceeding, $200. The February, May, August, November are not too far behind and put up a decent showing. April, however, is quite lean, as it has not even come close to eclipsing $100 yet.

This is ok, because I know over the next 2 months, higher dividend income is there, awaiting to be summarized. Also, because of pullbacks with Cardinal Health in April, I was able to add to my positions, so when July comes around, the number should increase,

Let's take a look at the Dividend Payment History:


...and represented graphically:

Looking at the Year/Year and Quarter/Quarter comparison, I see there is good news and not so good news:

My April 2016 dividend income was $27.91, and a year later it has increased 131.3% to $64.56! If you can't tell, this is the good news.

In the previous quarter, my dividend income for January 2017 was $70.45. Yeah, this is the not so good news (cue the Darth Vader theme).

Dividend Income has actually decreased -8.4% since January 2017. I haven't sold any of these holdings, so how can this be?

One culprit, you could say, is Disney (not really a culprit, but simply a reason). Disney doesn't pay their dividends quarterly, they pay every 6 months instead. Their last payment was in January 2017 ($8.58), and so obviously that payment did not come in April.

In also some of the previous quarters, I had reaped the benefits of late ETF payments for the March/June/September/December months, and some had spilled over to the following month. No such luck this time!

With these 2 factors contributing, it doesn't look so bad, other than the fact that this group of months really lag behind the other months. This happens as balanced months is not my main goal, it is purchasing shares in great companies at a good value. Sometimes that value in present in companies that pay in certain months and not others.

One upcoming bright spot, as mentioned earlier, is that later in April, I added some shares to my CAH holdings, on the big drop after they announced a lower guidance. It offered a better price, and so I jumped in, as I feel good about the company over the long haul (people are going to need their meds, both brand name and generics), so I feel good about the purchase.

In Conclusion:
So there you have it for April 2017, not my greatest month ever (that was March 2017), but with a deeper look into it, the progress is still there, and I will continue to move it forward.

How was your April 2017? Let me know below in the comments!

Saturday, April 1, 2017

March 2017 Dividends

Another month gone, and here we are in April. A great time to summarize my dividend income for March 2017. I've made a conscious effort, to not procrastinate with these updates, as I had a stretch where I was not publishing these until the next month was half over!

Not a good look.

To keep this top of mind, I decided to get on the ball once the month to be summarized ends.

So here we are. As you follow along, you'll see as I did, that this turned to be a pretty good month!

Let's get to the summary:

Taxable Accounts
Intel (INTC) - $2.86
Cummins (CMI) - $8.20
Target (TGT) - $28.80
Emerson (EMR) - $4.80
Compass Minerals (CMP) - $7.20
Flower Foods (FLO) - $18.88
Prospect Capital (PSEC) - $20.05
Qualcomm (QCOM) - $27.98
VF Corp. (VFC) - $7.98
Vanguard High Dividend Yield  ETF (VYM) - $7.37
Vanguard REIT Index Fund (VNQ) - $3.68

Taxable Account Total - $137.80

Roth IRA Account
Vanguard High Dividend Yield ETF (VYM) - $20.34
Vanguard Growth ETF (VUG) - $1.52
iShares S&P Small Cap 600 Index ETF (IJR) - $3.16
iShares S&P 500 Index ETF (IVV) - $11.48
T. Rowe Price (TROW) - $7.98

Roth IRA Account Total - $44.48

Overall Dividend Income for March 2017: $182.28

Forward 12-month Projected Dividend Income: $1,624.59

My March Buys:
Compass Minerals (CMP) - 1 share
Lazard Ltd (LAZ) - 5 shares
Qualcomm (QCOM) - 4 shares
T. Rowe Price (TROW) - 14 shares
VF Corp (VFC) - 16 shares
Williams-Sonoma (WSM) - 15 shares

Major Life News:
I got engaged to my girlfriend of almost 4 years!

It is an exciting time, as we make preparations for a wedding and likely buying a house together down the line.

My Thoughts on the Month:
I always enjoy reporting on progress of the March-June-September-December months, as these are my high income months. February-May-August-November come in second not too far behind, and January-April-July-October continues to lag behind, unfortunately.

Guess what?

The March 2017 income is an all-time high for me!

I was hoping to break the $200 mark, but the ETF payments were a little less than I was hoping for, and unfortunately they vary from quarter to quarter, so you don't really know until Vanguard and iShares make their distribution announcements, about a week before their payouts. One of the reasons I like investing in individual dividend growth stocks, is that you pretty much know what to expect from the payouts, as long as the dividend isn't cut. When it is raised, even better!

Let's take a look at my dividend payment history:


So now let's do the year and quarter comparison

My March 2016 dividend income was $52.16, and this was the month I shifted my focus to a DGI strategy. After a year, this income grew to $182.28, which is an amazing 249.5% Y/Y increase!

Looking back to December, my dividend income was then an all time high at $168.03. After a quarter, this has grown to $182.28, which is a more modest 8.5% Q/Q increase.

It pales in comparison to the Y/Y increase, but some perspective: imagine getting an 8.5% raise every quarter at your place of employment, as opposed to the standard 3% yearly raise.
Wouldn't you take it? I'll definitely take it!

Also, I am very excited about the major life news!

This will however change things in the near future regarding my DGI progress. We will be saving money for the wedding and house down payment over the next 1-1.5 years. Chances are we will be saving the money in a savings account (or possibly a permanent portfolio allocation) just to be more sure that the money will be there when we need it next year. I hope to still allocate some money every month to my DGI portfolio as well, but it will be significantly lower than the current level. Worst case scenario is that I have to deplete this portfolio to help pay for both, and in that case I just rebuild it, with the better knowledge than I had when I started (obviously I'm hoping I don't have to do this). Realistically, I may have to draw some from this portfolio, so that would be a temporary setback, but one I am confident I could come back from once we are married and have enough for the house down payment. Our plan is to reach FIRE by 2025, and the mindset is to do what it will take to achieve that, through side hustles or whatever else, once these big expenses are taken care of.

Back on the dividend front, I, on a high from reaching an all-time high in dividend income for March 2017, remind myself that next month, the income will be substantially lower, as the January-April-July-October months, as previously mentioned, are my lowest for dividend income.

Hopefully at some point I'll better balance across all the months, but for now it is what it is. I will not prioritize dividend income balance across the months over valuation. We'll see how April will turn out, but for now, I am excited about the future, in dividend income and life in general.

Thanks for reading, so how was your March? Let me know in the comments!