Last year, I created the Rock Solid Ranking, a dynamic stock ranking list that shows a value for each dividend stock I follow. I’ve worked on calculations that consider several metrics in order to find the best companies among all those on the stock market. This list is particularly useful when the stock market is becoming highly valued (not overvalued yet in my opinion).
Starting this month, I’ll be sharing with you, for free, the top 10 dividend growth stocks for both the US and Canadian markets. You can download your report here:
July 2015 Top 20 Rock Solid Ranking
I personally use this list to manage my own portfolio along with portfolios I manage at Dividend Stocks Rock. This is not an ordinary ranking where we arbitrary apply a score to dividend stocks. We actually build a dividend growth model where multiple factors are accounted for in the score calculation. We started by listing the most important metrics we follow before buying a stock. Here’s the list:
1 year Revenue Growth
5 year Revenue Growth
1 year Earnings per Share (Diluted) Growth
5 year Earnings per Share (Diluted) Growth
1 year Dividend Growth
5 year Dividend Growth
Dividend Payout Ratio
P/E ratio PEG
Dividend Yield
Debt to Equity ratio
Price to Book Value
Explanation of metrics used
In order for you to understand why I’ve decided to use the above mentioned metrics instead of others I’m providing you with this complete explanation of how I came up with this ranking.
If a company can’t keep up its high ranking, it means its losing pace with one or more important metrics in our model. The more it loses ranking, the closer it is to joining the sell list. On the other hand, a company that improves its scores quarter after quarter definitely earns the buy mention as it shows it’s going towards the right direction. The Rock Solid Ranking goal is to provide an instant valuation of a stock according to our dividend growth investing model.
I’m not going to disclose our calculation methods here but I’ll tell you which metrics we follow. This can help you build your own investing model. Total score of a company could technically reach 100% if it was perfect on all attributes. The score can also be negative as we give penalties for negative growth numbers.
#1 SALES
In my opinion, if you don’t sell, you can’t make money. If you can’t make money, you can’t pay dividends. If you can’t increase your sales, you can’t increase your profits and you can’t increase your dividend. This is why revenue growth is so important. The best way to measure if a company is making more money is by looking at its revenue growth.
A company can run through a tough year or show erratic revenue movements. This is why we take a look at both 1 yr and 5 yr revenue growth. The first metrics to be used in our model is:
1 year Revenue Growth
5 year Revenue Growth
More weight is given to the 5 yr and penalties (negative score) are attributed to companies that show negative revenue growth. You can’t hope to increase your dividend consistently if your revenues decrease.
#2 PROFITS
Showing strong revenues is important, but it doesn’t guarantee you will get strong dividend payouts. Profits drive amounts to be paid through dividends. If you look at a company like Amazon (AMZN); revenues are huge but profit is thin. Therefore, they can’t hope to pay a dividend at this point in time (especially when your P/E is 574!).
In order to make sure we don’t give a high score to a company that recently restructured its costs or sold an important asset to boost its profits, we also consider 1yr and 5yr Earnings Per Share (EPS) growth.
1 year Earnings per Share (Diluted) Growth
5 year Earnings per Share (Diluted) Growth
Earnings and revenue growth combined together weigh a lot in our model. Both metrics combined together is the key for a sustainable business model. This is why so much weight (40%) is attributed to these 4 metrics.
#3 DIVIDEND METRICS
Once we have found companies with sales and profits, it’s time to take a look at what we desire most: dividend growth potential! In order to find out if a stock is not only a good stock but a good dividend stock, we use 3+1 different metrics. The “+1” is because we look at both 1yr and 5yr dividend growth percentages:
1 year Dividend Growth
5 year Dividend Growth
Dividend Payout Ratio
Dividend Yield
The 1 year dividend growth shows the company’s willingness (or capacity) to increase its dividend over a short period of time. The 5 year dividend growth confirms this willingness/capacity to keep increasing payments to shareholders.
Then, the dividend payout ratio is also very important to us. We penalize companies paying over 120% of their earnings. We didn’t select 100% as we must always take into consideration that the payout is in $ and the profit is an accounting term (including amortization for example). This is why it’s important to give some room for high dividend payout ratio companies. We also give a smaller weight to companies with very low payout ratio (0-20%). This shows the company would rather keep its money in its bank account instead of sharing the wealth with stockholders.
Finally, the dividend yield is also a debated topic. Some investors are looking at 5%+ dividend yield (I keep receiving tons of emails telling me I look for low yield dividend stocks). Some others (like me!) prefer sound businesses with dividend stocks around 3%. In the past four years, I’ve noticed that stocks paying over 4% often show shakier metrics than stocks with a lower yield. Dividend metrics combined together represent 40% of our ranking calculation.
#4 DEBT LEVEL
Another important data is the debt level of a company. The idea behind the choice of this fundamental is simple; debt payment requires cash flow, cash flow that could be used to pay dividends. You don’t want a company strangled by their debts and forced to make unfortunate decisions. This is why we use a debt ratio in our model:
Debt to Equity ratio
Here again, a high debt to equity ratio is penalized by negative points.
#5 STOCK VALUATION
Finally, the price you pay for a stock is also important. I’m the first one to pay a relatively high price for a great company. Still, if I can find a company that is relatively similar but traded at a cheaper price than another, I will definitely take a look at it.
We have used the following metrics in our system to give points to each stock:
P/E ratio PEG
Price to Book Value
10 of these Stocks are part of our Real-World DSR Portfolios
From the July Top 20 Rock Solid Ranking list, there are 10 companies that are held in our DSR portfolios:
BlackRock (BLK)
Intel (INTC)
Helmerich & Payne (HP)
Hormel Food (HRL)
ScotiaBank (BNS.TO)
National Bank (NA.TO)
Intact Financial (IFC.TO)
TD Bank (TD.TO)
Potash (POT.TO)
Royal Bank (RY.TO)
You can see how we performed since we created our dividend growth portfolios here
