High Yield Dividend Champion Portfolio for February

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott's Investments (see the right hand column for a link to the spreadsheet).

Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to gauge the “best” high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

Last month I announced some changes to the ranking system. The changes were not due to poor performance – the strategy has returned over 46% in the past two-plus years:

We still begin with the Dividend Champion list. The  list is first sorted by yield and the lowest 50% yielding stocks are eliminated.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase).  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

This month there are three new positions. Tompkins Financial (TMP) was sold for a gain of 2.82% (excluding dividends) with an original purchase date of 8/5/2011. Community Trust Bancorp (CTBI) was sold for a gain of 22.55% (excluding dividends) with an original purchase date of 4/6/2011.  Questar (STR) was sold for a gain of 10.92% (excluding dividends) and was just purchased on 1/7/2013.

Proceeds from the sale were used to purchase 599 shares of 1st Source (SRCE), 269 shares of American States Water Company (AWR) and 156 shares of Air Products & Chemicals (APD). Eagle Financial Services (EFSI) was actually ranked higher than SRCE; however, given the low trading volume of EFSI I have decided to exclude it from the list going forward.

The top 15 stocks based on the new ranking methodology are below and displayed in order of their ranking:

All returns exclude commissions and taxes and are hypothetical. Real results will differ