An easy dividend checklist for your income portfolio

Wednesday, Sep 18 2019 by
41
An easy dividend checklist for your income portfolio

Checklists seem able to defend anyone, even the experienced, against failure in many more tasks than we realized. They provide a kind of cognitive net. They catch mental flaws inherent in all of us—flaws of memory and attention and thoroughness. And because they do, they raise wide, unexpected possibilities.

Atul Gawande, The Checklist Manifesto: How to Get Things Right

Show me the money!

-- Ron Tidwell, Jerry Maguire

Everybody likes getting paid - we’re all a little bit ‘Ron Tidwell’. That’s why so many of us search for stocks with dividends. There are many academic arguments in favour of consistent payments to shareholders: they don’t just provide a (relatively) reliable return - they can also cushion capital losses, reduce portfolio volatility, and provide a handy reference point for valuation.

The most intuitive pro-dividend argument is the ‘bird in the hand’ theory, which says dividends today are more valuable to some investors than less certain capital gains tomorrow. This thinking goes as far back as Benjamin Graham who, in an updated version of his book Security Analysis, wrote that ‘the typical dollar of reinvestment has less economic value to the shareholder than a dollar paid in dividends.’ If this is true, then it follows that a dividend-paying stock should trade at a premium to an identical company that does not pay a dividend.

What’s more, the compounding effects of reinvested dividends can be a powerful force for an investor. The contribution of dividends to total stock returns - the measure used in most academic studies that form the basis of successful real-world strategies - is formidable. 

Some assorted illustrations from various sources:

  • The total compound annual return for the S&P 500 Index with dividends reinvested from the beginning of 1926 to the end of 2015 was between 9 - 10% as compared with 5.8% on the basis of price alone (source: CFA). 

  • Similarly, from 1950 to 2015 the Nikkei 225 Index returned 8.3% compounded annually based on price, but 11.5% with dividends reinvested (source: CFA). 

  • Schroders/Cazenove data shows that, from the end of 1999 to the end of 2018, the FTSE 100 would have generated an annual return of 3.54% with dividends reinvested, compared with -0.04% if you had invested in just the index.

  • Antti Ilmanen in his 2011 book Expected Returns: An Investor's Guide to Harvesting Market Rewards found that, from 1900 to 2009,…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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EVRAZ plc is a steel, mining and vanadium business with operations in the Russian Federation, Ukraine, the United States, Canada, the Czech Republic, Italy, Kazakhstan and South Africa. The Company's principal activities include manufacturing steel and steel products; iron ore mining and enrichment; coal mining; manufacturing vanadium products, and trading operations and logistics. Its segments include Steel; Steel, North America; Coal, and Other Operations. The Steel segment is engaged in the production of steel and related products at all mills except for those located in North America. The Steel, North America segment is engaged in the production of steel and related products in the United States and Canada. The Coal segment includes coal mining and enrichment. Other Operations include energy-generating companies, shipping and railway transportation companies. more »

LSE Price
417.7p
Change
-3.9%
Mkt Cap (£m)
6,309
P/E (fwd)
5.7
Yield (fwd)
12.8

Centrica plc is an energy and services company. The Company's segments include Energy Supply & Services-UK & Ireland, Energy Supply & Services-North America, Connected Home, Distributed Energy & Power, Energy Marketing & Trading, Exploration & Production, Central Power Generation and Centrica Storage. The Energy Supply & Services-UK & Ireland segment includes UK Home, UK Business and Ireland. The Energy Supply & Services-North America segment includes NA Home and NA Business. The Company is engaged in the supply of gas and electricity to residential customers in the United Kingdom, and the installation, repair and maintenance of domestic central heating, plumbing and drains, gas appliances and kitchen appliances, including the provision of fixed-fee maintenance/breakdown service and insurance contracts in the United Kingdom. The Company is engaged in the supply of gas and electricity and provision of energy-related services to business customers in the United Kingdom. more »

LSE Price
67.52p
Change
-1.8%
Mkt Cap (£m)
4,001
P/E (fwd)
7.7
Yield (fwd)
7.4

Aviva plc is a United Kingdom-based holding company that provides life insurance, general insurance and asset management products and services. Aviva Investors provides asset management services to Aviva and external clients. Its segments include United Kingdom & Ireland; France; Poland; Italy; Canada; Asia; Aviva Investors, and Other Group activities. It distributes products to its individual, group and corporate customers directly and via a network of intermediaries and partners. more »

LSE Price
396.8p
Change
-2.1%
Mkt Cap (£m)
15,871
P/E (fwd)
6.8
Yield (fwd)
7.9



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19 Comments on this Article show/hide all

Skweeka 18th Sep 1 of 19
1

The link to the checklist doesn't appear to be working, just goes to 'Create a Checklist'

| Link | Share | 1 reply
Jack Brumby 18th Sep 2 of 19
1

In reply to post #514576

Thanks for flagging - this may be to do with admin privileges. I've added an edit in case this happens for others as well.

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herbie47 18th Sep 3 of 19

It says now that no companies qualify for that checklist.

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Gastone 18th Sep 4 of 19

the link is not working

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Hydrus 18th Sep 5 of 19

I think this is a bit too simple to be of real help. For example, Coca Cola only passes 1 of the 4 criteria (Net gearing 174%, Dividend cover 1.01 (forecast 1.29), Free cash flow below dividend recently) but it has raised its dividend for 55 years in a row and whilst growth might be harder to come by in future I suspect it will be raising its dividend for many years to come. Unilever (LON:ULVR) only passes 2 of the 4 as far as I can tell as a further example of a high quality stock with a great history of dividend increases.

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Mike888 18th Sep 6 of 19
1

The criteria mentioned are often stated for such screens, but I'd say use them as an initial screen and then apply all the rigour you would for any investment. Cover, FCF, gearing are all point in time figures based upon how that company is currently trading. However that same company could be in a situation whereby its margins are decreasing due to increased competition, it may now be changing tack in respect to acquisition led growth rather than organic etc.  etc. 

I guess my point is, whether your portfolio is to generate income or capital gain, it's important that selection is based upon a full analysis of current and future prospects,  because, guess what, those dividend strength ratio's could evaporate tomorrow.

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hill 18th Sep 7 of 19
1

Thanks for this Jack, I had been doing something similar but manually in excel. This allows me to automate the process and rank the dividend risk of my different shares as part of the overall analysis. 

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ddinksdadd 18th Sep 8 of 19
1

A Bit more work required on that link Jack!

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Jack Brumby 19th Sep 9 of 19

In reply to post #514621

Thanks Gastone, we're working on it... I've removed it for now!

| Link | Share | 1 reply
Jack Brumby 19th Sep 10 of 19
3

In reply to post #514631

Coca Cola is a great example to bring up... One of the advantages of a checklist over a screen is that the company doesn't have to pass ever check in a checklist, whereas it either qualifies for a screen or it doesn't. As long as you understand, and are comfortable with, why a company doesn't pass certain checks then it makes sense to be flexible. It's more using a checklist as a mental framework for a structured and systematic way of analysing these things that could be the real benefit.

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Nick Jacobs 20th Sep 11 of 19
2

In reply to post #514631

Even the greatest companies stop being good investments eventually. If Coca-Cola's free cash flow continues to be below its dividend payout, simple arithmetic tells you it won't be able to maintain its dividend. Maybe the checklist is telling you something.

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Velo 21st Sep 12 of 19

In reply to post #514711

Jack - the link functioned perfectly for me, despite so many complaining it was inaccessible.
(I still use the "old" site; maybe that had something to do with it??)

Dissapointed you've removed it. Perhaps you could temporarily leave it in place with a (bracket) saying (under review) ?

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Pierreavb15 21st Sep 13 of 19

I did not find the metric for Cash generation setup. What is the name of the related metric and how to set it ? (under 1 ? ) 
BR

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clarea 21st Sep 14 of 19

In reply to post #514591

Hi Jack just noticed AA has negative net gearing giving it has over 2 bil of debt what does this mean ?
Thanks Andy

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Gromley 21st Sep 15 of 19
3

Andy ,

I think it means that AA (LON:AA.) should not qualify for Jack's screen at all.

It wasn't in the article, so not sure if you found it by replicating the screen?

It's a useful reminder that some screens need you to consider the "zero gateway".

The issue here is that AA has a negative book value.
If the book value was £1 , the gearing would be huge. At a book value of -£1 (or lower) the gearing would be very low (but also negative), but low gearing for this reason is not a good thing!

You cannot supplement the filter to exclude negative gearing, because companies with net cash rather than net debt can have negative gearing.

So the extra test I think you would need to add to the filter would be Book Value > 0.

That doesn't (perhaps) entirely rule out AA (LON:AA.) as a potential investment; but it certainly doesn't meet the intended selection criteria of this screen.

| Link | Share | 1 reply
clarea 22nd Sep 16 of 19
1

In reply to post #515396

HI Gromley,

Thanks I didn;t try and get the AA to fit the screen as wouldn't touch the stock with a barge pole another private equity victim of being loaded with debt.

I was just interested in how the gearing stat could work when looking at stocks in general so thought lets have a look at the AA with its billions in debt expecting a figure of about 800% ish but showing positive not negative value.

So I guess what your saying Gromley is because once the assets had been sold off if AA went bust it would still owe billions backed by nothing other than the promise of repayment thats where the negative figure comes in ?

Thanks Andy

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23jez 23rd Sep 17 of 19

I am relieved I own 4 of these shares and have done for more than 40 years; all are on drip schemes.

I  am curious to know why BP and Shell are not on your list.

Regards 23Jez

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Vinod Muthanna 30th Sep 18 of 19

Thanks, very useful.  I hadn't realised it is so easy to create a check-list.

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paulgill28 6th Oct 19 of 19

Jack

From your Stretch Yield Screen parameters above re the Cash Generation parameter I am a little confused.  I understand if dividends exceed free cash flow then the dividends are reducing the company's cash reserves.  So in setting up this particular parameter in the screening tool one needs to compare FCFPS to DPS and presumably the formula should be FCFPS > 1 x DPS, which would exclude any stock where the DPS is greater than the Free Cashflow per share.

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Your confirmation of this understanding would be appreciated.

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