You’ll notice that none of these are directly related to dividends and that is intentional. We want to identify attractive stocks first and then further screen candidates for dividend yield and growth. We also do not want to own stocks in this portfolio that are unlikely to be able to continue raising their dividend. Dividend growth requires earnings and cash flow growth to be sustainable.
You’ll also notice that we don’t include stock buybacks as part of this systematic portfolio. That too is intentional. We want companies whose cash return to shareholders is predictable and sustainable. Stock buybacks are generally neither. In addition, future changes to the corporate tax code may make buybacks less desirable.
We use this initial screen:
- Market Cap > $1.5 billion
- No industry > 40% of the portfolio
- Positive earnings
- Debt/Equity < 70%
- Yield > 2%
- Payout ratio < 70%
- This year’s dividend > last year’s dividend
- A rank in the 50th percentile of the Market For Lemons ranking system
Stocks that pass the screen are then ranked by our Dividend Income ranking system and the top stocks chosen for the portfolio. Like the other two portfolios, we can run this portfolio with 20-15 stocks or 10. The holdings are checked monthly for sell criteria:
- Dividend Income ranking < 85
- 20% down from the purchase price