A Valuation Exercise: The Dividend Aristocrats

We all know that there are 1000′s of dividend stocks that are potential investments, but it is difficult to find ones that are truly worthy of further analysis. One trick I like to use to generate a smaller list of investments to further analyze is to start with the S&P High Yield Dividend Aristocrats list and do some quick valuation screens on them to better understand where to spend my time. Let me explain how this works so that you can do it one your own.

Getting a List of Stocks to Start With

The first step is to grab the list of high yield aristocrats from the S&P website. I have not provided a link directly to the page that hosts this list, as S&P has a real habit of moving their pages around so any link I provide could be wrong in an hour! However, to find the list just follow these steps:

1. Direct your browser to http://www2.standardandpoors.com
2. Select the United States link
3. On the left hand side of the screen, hover your mouse over ‘Indicies’
4. In the box that opens up, click on S&P U.S. Indices
5. Click on ‘S&P High Yield Dividend Aristocrats’
6. Click on ‘Constituent List’ that appears under the tabs in the index section.
7. Download the Excel file and open it up into Excel

Yeah I know – I wish S&P would just list the companies on a web page but for some reason they make you download it and open it up in Excel. The list you get is the 50 highest dividend yielding companies that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. Not a bad list to start with.

Sorting the List By Yield

The next step I take is to sort this list of stocks by yield, from highest to lowest. These stocks are companies that have shown a long term track record of good performance – any company that has been able to increase dividends for over 25 years has to be doing something right! I bring this up because on this blog I have talked about avoiding stocks with unusually high yields. These do not necessarily fall into that based on this long term performance.

This step is a little tedious because it involves looking up each ticker symbol on a site like Morningstar and recording the dividend yield as a percentage in the Excel spreadsheet. With this complete for each stock, sort the list by yield and select the top 10 highest yielding stocks.

Run a Quick Valuation Exercise on the Top 10 High Yield Aristocrats

The next step involves some further internet research but the good thing is that because we are only dealing with 10 stocks, it takes only a fraction of the time the step above took. For this step I look to use the research section over at the Motley Fool. I use this because they list a 5 year average dividend yield for stocks. Here are the steps I go through to get this data:

1. Go to http://caps.fool.com/
2. In the search box, enter the ticker symbol for the stock you want data for
3. Click on the ‘Ratios’ tab
4. Find the field marked ‘Dividend Yield – 5 Yr Avg (%)’
5. Record the 5 year average yield into your Excel spreadsheet

Do this for each stock until you have the current yield and the 5 year average yield for all 10 stocks on your list.

Look for The Stocks with a Current Yield Greater than 5 Year Average Yield

By looking for stocks with a higher current dividend yield than the 5 year average, you are identifying those companies that are trading at a discount compared to their historical average. Those stocks that exhibit this property are great candidates to conduct further analysis on. Sometimes you will have 1 stock on the list and other you may have 8 to 10. Since the next stages of fundamental analysis takes much more time, doing this initial up front work can save you lots of time in the long run.

A Caveat

This process is NOT a buy screen – it DOES NOT generate a list of stocks to buy. It is only a way to identify stocks for further analysis. Please do keep that in mind.

In a future post, I am going to explain an alternative way to conduct this screen. To ensure you see this post, please make sure you sign up for my RSS feed.