Back in January, I started a power ranking over our Dividend Growth Index. The ranking was done purely based on my perception of each stock. Unfortunately, I couldn’t analyze all 24 stocks. This is why the ranking was not fair for all stocks (especially since I didn’t know all of them inside & out).
I’m trying it again this month with a different method. I’m actually rating the 24 stocks according to my secret algorithm (I’m playing Google here 😉 lol!). But seriously folks, I thought of using metrics in order to establish which stocks are « better » than the others. I’m currently building a “stock rating calculator” and wanted to have your feedback on it. This could be an awesome tool to use in the future that would help pick the best stock among those you are considering. Here are the metrics I’ve taken into consideration:
Most Important Metrics
I’ve divided the metrics into 2 groups. The first group is concentrated on dividend metrics only and has more weigh in the ranking calculations. Since I want to build a tool that evaluates the best dividend stocks, it’s only normal to use these metrics as the main factors.
Dividend Yield
What is more important than dividend yield when you are building a dividend portfolio? Using the dividend yield as one of the main metrics was obvious to me. I don’t want to build a portfolio with low yield even if the stock is part of the dividend aristocrats. My personal target is over 3%, so the higher the dividend yield, the more points the stock gets.
Dividend Payout Ratio
A high dividend yield is nothing without a low payout ratio. It’s useless to have a 7% dividend yield with a 150% dividend payout ratio. This is why it is the second metric I follow. My personal target is to be below 70% in most cases with a few exceptions here and there.
Dividend Growth
The last major factor to be considered is the dividend growth. I don’t only want a high dividend yield combined with a low payout ratio, I also want to make sure that there will be dividend growth over time. This is the most important thing to look at since this is where all the strengths from dividend investing come from. This is how a stock like Coke (KO) will eventually pay you a 6% dividend yield if you are patient enough.
Other Metrics Used
Dividend payouts are certainly a good thing but I also want to make sure that the company will also be able to maintain and grow its dividend. This is why I’ve added 4 more metrics that will follow the “business sustainability” over time.
Profit Growth
Dividends are paid from profits. So if you want to see dividend payouts increase over time, you need a nice up trend in the profits as well. They are both linked together.
Revenue Growth
Instead of looking in all financial statement to make sure that the profit generated is not linked to the sale of assets, I also look at revenue growth. A healthy business will show both profit and revenue growth.
Debt Ratio
The key to dividend investing lies within liquidity. High revenue growth usually leads to high profit growth that leads to dividend growth. One thing that could prevent this formula from working is the level of debt the company has. This is why it’s important to make sure that the company is not financing a part of its dividend (as is the case when you hit a payout ratio over 100%).
P/E Ratio
The last factor to be considered but not the least is in regards to the current stock evaluation. I’m looking for great stocks but not at any price.
How Factors Interact with Each Other
I first started to give points to each factor according to how strong (or weak) they were compared to the rest of my list. However, when a stock had a very weak factor (such as high payout ratio or negative revenue growth), I noticed it wasn’t penalized enough. This is why I came up with the idea of subtracting points for a negative metric. Therefore, if a stock has a very strong dividend yield, it will take more than only this factor to figure on the top of the list.
It’s important to understand that the ranking is given compared to the other stocks in the list. Therefore, if I create 3 different lists with different stocks; I would get different rankings as well. Here’s what I have for our dividend growth index:
Dividend Growth Stock Rating
| Ticker | Name | Price | Dividend Yield | Payout Ratio | Score |
|---|---|---|---|---|---|
| INTC | Intel Corp | 27.825 | 3.02 | 31.89 | 68 |
| ETE | Energy Transfer Equity LP | 43.1497 | 5.81 | 0 | 64 |
| CNQ | Canadian Natural Resources Ltd | 33.98 | 1.23 | 14.98 | 63 |
| AFL | Aflac Inc | 47.28 | 2.79 | 28.11 | 63 |
| CVX | Chevron Corp | 109.85 | 2.95 | 22.83 | 59 |
| PM | Philip Morris International Inc | 85.78 | 3.6 | 57.82 | 58 |
| COP | ConocoPhillips | 76.6886 | 3.45 | 29.21 | 54 |
| HSE | Husky Energy Inc | 26.06 | 4.59 | 50.09 | 53 |
| NVS | Novartis AG | 54.46 | 3.84 | 63.23 | 51 |
| ABT | Abbott Laboratories | 59.2401 | 3.44 | 63.69 | 47 |
| PEP | PepsiCo Inc | 64.11 | 3.22 | 49.55 | 47 |
| MCD | McDonald's Corp | 98.03 | 2.86 | 47.42 | 47 |
| SPLS | Staples Inc | 16.37 | 2.68 | 28.23 | 45 |
| WMT | Wal-Mart Stores Inc | 61.1575 | 2.6 | 32.04 | 44 |
| CNR | Canadian National Railway Co | 79.292 | 1.89 | 23.81 | 44 |
| KO | Coca-Cola Co/The | 69.92 | 2.92 | 50.09 | 43 |
| NA | National Bank of Canada | 79.751 | 3.75 | 38.36 | 43 |
| EPD | Enterprise Products Partners LP | 50.962 | 4.86 | 98.09 | 40 |
| BNS | Bank of Nova Scotia | 55.291 | 3.98 | 44.36 | 39 |
| PG | Procter & Gamble Co/The | 67.7438 | 3.1 | 47.77 | 39 |
| FTS | Fortis Inc/Canada | 32.2 | 3.72 | 68.24 | 36 |
| RY | Royal Bank of Canada | 58.34 | 3.9 | 46.61 | 31 |
| CLC | CML HealthCare Inc | 10.66 | 7.11 | 101.23 | 30 |
| BIN | Progressive Waste Solutions Ltd | 21.29 | 2.64 | 50 | 18 |
What do you think? Do you agree with this ranking? Do you think it could be useful when you build your portfolio?
Good article Mike, but I can’t find many of my favorites. I guess they just don’t rate under these metrics. I like to be provoked like this and also pushed a little bit to look at “new” stocks to replace some of my laggards.
@Michel,
I’ve used the Dividend Growth Index stocks to rate them. So if you hold position in TD for example, it won’t be part of this chart.
Nice to see a couple of my picks up there 🙂
I have a similar stock screening process with my value metrics and regularly monitor over 100 stocks. I also track the 52 week range for an entry point since that’s what really matters as the list is already a list of companies I am interested in. I also track the market capitalization to assess the economic moat
I have the same ranking system. I have basically the same metrics but I think yours seriously lacks one: the number of years a stock has been paying and increasing dividends. I never look for stocks under 5 straight years of increasing dividends. Then I have 3 categories : 5-9, 10-24 and 25+. These are worth the same points and only used to categorize stocks for asset allocation as low risk (5-9), very low risk (10-24) and virtually no risk (25+) 🙂
I forgot I have one more metric: price trend (short 1yr, medium 5yr, long term Maximum # of years available). Trend needs to be positive or side ways as I don’t want my investment to disapear.
As an example take a look at pitney bowes. 8%+ annual dividends, all metrics are very favorable but technically the stock has been dramatically going down for the past 10 years. My interpretation is that postal services are out in this internet age. but i might be wrong on this. anyway that’s a big turn off for me.
I do not think you should base everything off of this ranking. But it is definitely a place to start!
I like the idea mentioned about including economic moat. Also, some kind of forecast as to how the company is likely to fare in the future, which is why I always check the S&P commentary on a stock before investing, despite it’s great dividend metrics.