Goal for my stock portfolio

My stock buying guidelines

The general principle to buy a stock is to convince myself that the stock is a really good long term investment.  

1. The company must be one of the CCCs.

The CCCs stand for Dividend Champions, Contenders and Challengers, as maintained by David Fish monthly. Dividend Champions are companies that have increased their dividends for at least 25 consecutive years, while Dividend Contenders and Challengers are companies that have increased dividends for at least 10 and 5 consecutive years respectively.

Although there are gems besides the companies in this CCC list.  I have to say that I am not able to hunt for them as far as my current knowledge and time concern.  The companies in the CCC list prove with time their excellent performance, and they are a long list too.  I'll start with the Dividend Champions first. My current holdings JNJ, PG, WAG are all among the Champion list.

2. The company must has a sustainable moat and product. 

The company should be a big player in its industry.  Compared to its competitors, it has its own advantages.  Also the industry should have higher barrier to entry for future competitors.  It could be large scale of investment,  infrastructure build up,  the industry leader who heavily influences the industry future trend.  Technology and patent should be considered here too, but need to be caution of valid period.  

 5. Wait for a desirable entry point

Dividend growth investment is an attractive strategy for me.  However, after reading many articles on seekingalpha.com, I still can't convince myself to agree with the popular opinion of DG investment that an entry point doesn't matter.  To me, entry point does matter because if I patiently wait for a low entry point that I desire, the initial capital gain from my patience can worth one year or years of dividend income.  The reality of stock market is that, every now and then, some of the stocks in the watch list will get back to the price point that is attractive enough to me.  Patience pays off. 

Another reason to buy stock on sale is the high yield on cost.  The lower the initial purchase price, the higher the yield on cost.  This buy-on-dip benefit will become more and more obvious later when the valuation of a quality company increases along with time.

Plan: PG & KO

PG's market price is at premium.  I plan to sell part of my shares.  My reasoning is as following:-

Current annual Dividend: $0.56 x 4 = $2.24.

Given dividend annual growth rate at 8%, in five years, annual dividend will be $3.05, and the total dividend earned in five years will be $13.14.


My average purchase price: $61.33.

Given a selling price at $76.50, the capital gain per share will be $15.17 (=$76.50-$61.33).

The capital gain is higher than the total of dividend in five years.  Since I believe there will be better entry points in five years for both capital gain and dividend earnings, I'll set target selling price at $76.50 and sell some of my holdings.

KO announced its 4th quarter performance today.  Mainly because of missing analysts' estimate, the price went down. This article explains well.  Thus, I'll treat this current dip as an opportunity for buying.  Will act at entry point $35.

Johnson & Johnson (JNJ) dividend analysis

From above analysis,

1) Solid financial health.  JNJ is a solid company and most of us should be concur on this point.

2) Market price valuation is at $63.16.

3) Payout ratio is very high, at 63%, which is out of my criteria range of less than 50%.

4) Yield is high, at 3.6%.

5) Dividend growth is optimal.  5-year dividend growth at 9.11%, 10-year dividend growth at 12.39%.

In the past 32 years , JNJ maintained a good history record of increasing dividend every year versus previous year.

With 10-years annual dividend growth rate at 12.39%, we can achieve 9.95% yield on cost even without considering dividend reinvestment.  If we wait till the market price pulls back a little to $63, we can achieve 10.59% within 10 years.  If considering dividend re-investment, the percentage will be much higher.

Disclosure: Long JNJ.

3M Co (MMM) dividend analysis

From the above analysis,
1) MMM financial performance is very healthy.
2) Current market price is slightly higher.  I would say $85~$86 is a reasonable entry price.
3) Payout ratio is nicely positioned at less than 40% of earnings and FCF.
4) Yield rate is 2.70%, lower than my criterion at 3%.
5) 5-year dividend growth is 4.6%; 10-year dividend growth is 5.99%.  So the dividend growth trend is slower in recent years. I would say 5.5% dividend growth is more reasonable to expect in the coming years.

From above two charts, without considering dividend reinvestment, in 10-year's time frame, yield on cost will be 3.83% based on dividend growth rate 5.99%.  While the 10-year yield on cost will be 3.35% based on dividend growth rate 4.6%.

With this stock, I can't achieve my goal of 10% yield on cost within 10 years time frame. However, if the price is cooled down, I may purchase some shares to diversify my portfolio. My entry point will be in the range of $81-$85.  At purchasing price at $81, the dividend payment could be doubled in 10 years.

Disclosure: None.  Will purchase some qty at the price range of $81-$85.

Colgate-Palmolive Company (CL) dividend analysis

From above analysis, CL price is currently overvalued, the reasonable entry price is around $91.

Current yield is 2.40%, which is lower than my criterion at 3%, which can be improved by waiting for a better entry price.

Annual dividend growth is acceptable at >12% for both 5-year dividend growth and 10-year dividend growth.

Also, CL is a highly leveraged company with Debt/Equity >2.

Disclosure: None. Plan to wait patiently for a reasonable entry price.

My check list for dividend growth stocks

First of all, I'll only focus on S&P 500 Dividend Aristocrats and S&P High Yield Dividend Aristocrats.


For each stock, here is how I'll do the analysis.


Company financial analysis:-

1) ROE (Return on Equity) >15%.
2) Debt / Equity <50%.
3) FROIC (Free Cash Flow / Total capitalization) >15%.
4) Cap Flow (capital expenditure / operating cash flow) <50%.
5) T. Rowe Price Ratio (Return on Equity / (1-payout ratio)) >15%.
Source: here.

Stock price valuation:-

1) Price to owners earnings (=price / (FCF/outstanding shares))  <15.
2) Current P/E ratio should be less than 5-year average P/E ratio.
3) Current market price should be less than DCF valuation.
4) Current market price should be less than Graham valuation.

Dividend analysis:-

1) Payout ratio <50%.
2) Dividend / FCF <50%.
3) Yield >3%.
4) 5-year dividend growth rate & 10 year dividend growth rate should both be > 8%.