In my previous article found here I reported on Dividend Champions that I felt were fairly valued.  In contrast to Dividend Champions that have raised their dividends every year for 25 consecutive years, Dividend Contenders have raised their dividends every year for 10 to 24 years. Therefore, I feel that the Dividend Contenders list also provides numerous excellent candidates for a retirement portfolio interested in generating a constantly-increasing income stream. Moreover, I believe there are many candidates on the Contenders’ list that also meet the seven criteria of quality and quantity that the venerable Ben Graham expressed.  The seven criteria are repeated here as follows:

  1. Adequate Size of the Enterprise
  2. A Sufficiently Strong Financial Condition
  3. Earnings Stability
  4. Dividend Record
  5. Earnings Growth
  6. Moderate Price / Earnings Ratio
  7. Moderate Ratio of Price to Assets

General Considerations and Thesis

In order to avoid being repetitive, I suggest that the reader refer back to my previous article through the link provided above, in order to review the principles, justifications and primary thesis underpinning both these articles.  However, the following summary of the main points that I am articulating will hopefully prove useful.

First and foremost, I believe that retirees can, and should, design and build a portfolio that contains the opportunity of providing an increasing income stream. Perhaps even more importantly, if this process is started early enough, a portfolio can be built that is self-sustaining regarding the distribution of income.  In other words, the portfolio can throw off enough cash to meet the retiree’s income needs without having to harvest principle. Second, I believe high-quality blue-chip dividend growth stocks can provide a safe and effective vehicle towards achieving those goals. Moreover, I further believe in controlling risk through diversification and the prudent adherence to fair valuation are imperatives.

Finally, I favor fixed income when yields are high enough to generate an adequate level of current income. But unfortunately, I do not feel that that situation currently exists.  Therefore, I am comfortable suggesting that the risk profile of fixed income is currently aberrantly high, and therefore, temporarily suggest avoiding investing in new ones, in favor of the higher-yielding blue-chip dividend paying stalwarts. In the future, when the levels of interest rates change in favor of higher yield, the portfolio could be rebalanced if the retiree prefers.

 However, I want to emphasize that I consider the current fixed income situation as both extraordinary and temporary.  Consequently, when the time comes when interest rates do normalize, I would once again support their inclusion in a well-diversified retirement portfolio. Because, for this to be true, the current yields on fixed income would be significantly higher than equities, which is normal, but not the case today.  Therefore, the retiree could get more current yield with fixed income, while utilizing an appropriate blend of equities as the driver of growth and as an income inflation hedge.

Fairly Valued Dividend Contenders

Ben Graham’s criteria 6 (Moderate Price / Earnings Ratio) and 7 (Moderate Ratio of Price to Assets) primarily relate to valuation. As I expressed in my first article and again here, I believe that valuation is a critically important component of a good common stock investment.  No matter how much I like a company, I am never willing to pay more than I believe the stock is worth. As it did in the first article, I would like to share words of wisdom from Ben Graham’s most famous pupil Warren Buffett on the subject of valuation:

“Most people get interested in stocks when everyone else is.  The time to get interested is when no one else is.  You can’t buy what is popular and do well.”

The Dividend Contenders list currently has 183 names on it. To narrow the list down, I have hand screened the Dividend Contenders one company at a time, as I previously did with the Dividend Champions, looking for those candidates that I believed best exemplified Ben Graham’s criteria, which simultaneously could be bought at fair value or below. It should be noted that my selection process with the Contenders’ list was also somewhat arbitrary where I excluded companies which did not possess the consistent records of earnings that I personally prefer.

Through this process I have identified 88 of the 183 Dividend Challengers that I felt meet Ben Graham’s criteria and are simultaneously trading at fair value or below. Although I believe that many of these Dividend Contenders might be worthy candidates, this list is offered as a precursor to a more comprehensive due diligence process. Also, because the market prices stocks so dynamically, valuations could moderately change between the time that this article was authored and current time.

I believe there are many good investments on this list of 88. However, some are more growth oriented, while others are more income oriented.  Therefore, their relative attraction will be a function of the individual investor’s own goals, objectives and risk tolerances. In other words, although I think many of these candidates possess attractive total return potential, as it was with the Dividend Champions, some will be more appealing for their yield, others for growth and yet others for a combination of both.

At this point, I believe it is useful to interject the principle that future returns comprising both capital appreciation and dividend income will be a function of each company’s earnings growth rate, and the valuation you pay on purchase. But as I have previously alluded to, some Dividend Contenders grow fast and some do not. Consequently, and as a general rule, assuming that each is bought at a correct valuation, faster earnings growth should produce the highest long-term returns, but do so at the highest relative risk levels. Higher growth is harder to achieve, and therefore more risky. Moreover, higher yield may produce greater total income, but perhaps a lower total return.  Therefore, each situation should be examined based on its own characteristics and merits, in concert with your own portfolio goals and objectives.

For additional clarity, I will feature a sample company from each of the cap size subsets.  However, since the Dividend Contenders by definition are comprised of companies that have raised their dividends for 10 to 24 consecutive years, some of my sample companies may not meet Ben Graham’s criteria of 20 years of dividends.

This will allow me to utilize FAST Graphs™ comprised of 15 years or less.  Those of you who read the previous article may recall that I was using 20-year earnings and price correlated graphs.  However, the problem is that we only type in every other year due to space constraints on graphs with longer than 15 years of history.  With the shorter graphs, each year is not only plotted but all the data is also typed in. Consequently, each year’s earnings growth and dividends will be clearly revealed in detail.

Furthermore, as I did in the previous article, I have placed a red circle around the general area of the great recession in order to illustrate how the fear of capital loss due to sinking stock prices is mostly a paper tiger.  Also note

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