Dividend Growth Stock Ranking System

In my recent post, “Stock Purchase: T Rowe Price (TROW),” I mentioned that I had developed a dividend growth stock ranking system to help speed up my stock selection process.  I also promised to lay out the details in a future post.  Well here it is.

In the past, I applied a series of six steps to analyze stocks.  These steps included looking at several dividend, fundamental, valuation and subjective parameters.  Even though I had a great starting point, David Fish’s CCC list, it still took many hours (or days) to sift through the 700+ stocks on the list.

Since I’m a numbers guy I decided to automate most of this process and develop a ranking system based on the parameters I was already using.  This new method can rapidly cut the 700+ stocks on the CCC list down to around 20-30; a much more manageable set of stocks that I can analyze in detail.  Here’s how it works…





Dividend Growth Stock Ranking System

The ranking system has a maximum score of 10 points and is divided into 3 categories.  Each category contains parameters that I believe define high quality dividend growth stocks.  Each parameters is assigned a numerical value which is weighted according to how important I feel the parameter is.  Keep in mind that the design of this ranking system is based on the qualities that I look for in a dividend growth stock and can easily be modified to suit your investing style.  Here are the 3 categories along with their associated parameters:

 

  1. Dividend Strength Category (4.5 points total)
     

    • Parameter 1: Yield (1 point max)
      • Less than 1.5%: 0 points
      • 1.5% – 2.99%: 0.5 points
      • 3% or more: 1 point

       
      Dividend yield is an important parameter to include in a dividend stock analysis. I always prefer a stock to initially pay me at least 3% yield, thus the full point assigned to such stocks. However, I give “partial credit” to stocks between 1.5% and 2.99% because a moderate yield combined with high dividend growth can be just as good (or better) than a high initial yield. Stocks less than 1.5% will take a long time to catch up even with strong dividend growth and therefore receive no points.

    • Parameter 2: 5-Year Dividend Growth Rate (1 point max)
      • Less than 5%: 0 points
      • 5% – 9.99%: 0.5 points
      • 10% or more: 1 point

       
      I believe that dividend growth is just as important as dividend yield – maybe even more important. In fact, I’m debating whether or not to weight this more than yield in the future. For now, this parameter has a maximum of 1 point if the 5-year dividend growth rate exceeds 10%. These cutoffs are loosely based on the average 5-year dividend growth rates of stocks on the CCC list with outliers removed.

    • Parameter 3: Accelerating Dividend Growth (0.5 points max)
      • Most recent dividend increase greater than 5-year average dividend increase: 0.5 points

       
      This is a rather crude way to screen for stocks that are accelerating their dividend increases. If the most recent dividend increase is greater than the 5-year average then the company might be ramping up their dividend growth.  This is one parameter that I will most likely optimize in the future.

    • Parameter 4: Dividend Payout Ratio (1 point max)
      • Greater than 70: 0 points
      • Between 35 – 70: 0.5 points
      • Less than 35: 1 point

       
      This is using the EPS dividend payout ratio found on the CCC list. This ratio is a measure of the company’s ability to cover their dividend payment.

    • Parameter 5: Dividend Increase Streak (1 point max)
      • Less than 5 years: 0 points
      • 5-24 years: 0.5 points
      • 25 or more years: 1 point

       
      The dividend increase streak is a measure of the company’s commitment to increasing their dividend. Obviously the longer the streak the better. All stocks on the CCC list will receive at least 0.5 points for this parameter since a 5-year streak is required to make the list.

     

  2. Financial Strength Category (4 points total)
     

    • Parameter 1: Past 5 Years Earnings Growth (1 point)
      • Less than 5%: 0 points
      • 5% – 9.99%: 0.25 points
      • 10% – 14.99%: 0.5 points
      • 15% – 19.99%: 0.75 points
      • 20% or more: 1 point

       
      I like to see at least 10% annual EPS growth over the past 5 years. I give my 10% target only 0.5 points to allow bonus points for companies that are growing even faster.

    • Parameter 2: Expected 5 Year Earnings Growth (1 point)
      • Less than 5%: 0 points
      • 5% – 9.99%: 0.5 points
      • 10% or more: 1 point

       
      Past earnings growth is great, but I also want to make sure the company is expected to continue growing.

    • Parameter 3: Debt / Equity Ratio (1 point)
      • Greater than 1: 0 points
      • 0.5 – 1: 0.5 points
      • Less than 0.5: 1 point

       
      I prefer a company to have little to no debt.

    • Parameter 4: PE ratio (1 point)
      • 20 or more: 0 points
      • Less than 20: 1 point

       
      This really belongs in the valuation section but I wanted to keep all of the data found on the CCC list in these first two categories.

These first two categories have a maximum score of 8.5 and represent all of the data available on the CCC list.  Since all of this data is provided nicely on the CCC list it takes just a couple of seconds to assign scores and rank order the stocks.  The remaining 1.5 points come from other sources and therefore take quite a bit of time.  For this reason, I like to assign a cutoff at this point and take only the top 75-100 stocks through category 3.

  1. Subjective Category (1.5 points total)
     

    • Parameter 1: Analyst consensus price target (1 point)
      • 0, 0.25, 0.5, 0.75 or 1 point based on % above current price, ((consensus-current)/current)*100

       
      I didn’t include my cutoffs for the different point levels because they change each month. The cutoffs are based on the average percentages and the standard deviation for the group of stocks that make it to this step. I set the average to 0.5 points, then the cutoff for each level above or below that is one standard deviation away from the average. I know it is not ideal to trust analysts for my valuation criteria but this was the easiest way I could think to do it. This really just serves as another way to differentiate between stocks that clump together with similar scores.

    • Parameter 2: Chart support, resistance & technical analysis (0.5 points)
      • Strong support, breakthrough resistance and/or good technicals: 0.5 points

       
      This is by far the most subjective parameter and therefore only receives a max of 0.5 points. Back in my options trading days I became very comfortable with analyzing charts to look for good entries and exits. This parameter really just boils down to whether or not I think the current chart technicals provide a good entry point for the stock.

After running all of the stocks through this dividend growth stock ranking system, I analyze the top 20-30 stocks in detail to decide which ones to buy.  This includes verifying all of the data used in the scoring, looking deeper at the company’s financials and looking for holes in my sector allocation.

As a real life example of how this ranking system works, here are the scores for T Rowe Price (TROW), my latest stock purchase:

TROW Dividend Growth Stock Ranking

TROW had a perfect score in my financial strength category.  The dividend strength category provides a good example for why it is important to dig a little deeper into your top stocks from the screen.  TROW scored 3.5 / 4.5 in dividend strength, getting penalized slightly for yield and payout ratio.  But considering the fact that the dividend growth is phenomenal I don’t really care about the relatively low initial yield and a payout ratio of 47 is very reasonable for a company like TROW.

 

In addition to pulling out TROW, I was pleasantly surprised to find that applying my dividend growth stock ranking system to the May CCC list uncovered almost the same 20-30 stocks that I found manually – and it only took 30 minutes!  Here are the top 34 (7.25 point cutoff):

May CCC Dividend Growth Stock Ranking Results

 

After receiving this list from my ranking system I go through each stock and analyze them in detail.  Notice that one stock, CNQ, actually ranked higher than TROW with a score of 9 / 10.  I decided to pass on CNQ though because it looks like their 2015 dividend payout might actually be lower than 2014 based on their first two dividends this year.

I will most likely analyze and write up a few of the other high scoring stocks at some point.

Conclusion

While this ranking system is still obviously a work in progress I think it is a good start.  It pulled out some great names that were very similar to the stocks I found by manually sifting through the CCC list earlier this month.

This won’t be my only source for finding great dividend growth stocks, it just provides a quick and easy way to build up a starting point each month.  I will still keep my eyes open for other opportunities.

Does anyone else use a similar ranking system?  Are there any suggestions on how I can optimize my parameters?  Your feedback is always appreciated.

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20 Responses

  1. Hi Dividend Empire

    I really like the ranking system! Even to the point where i would use it my self. :-)

    Thanks for the contribution.

    Regards
    Dividendfreedom

    • Dividend Empire Dividend Empire says:

      Thanks for the feedback Dividendfreedom! I will be sure to post the ranking results every month as soon as the new CCC list comes out.

  2. Dividend Empire,
    Excellent post! I will certainly use this ranking system. Thanks for sharing.
    Take care
    LOMD

  3. Ricardo says:

    This is a great system and seems to yield some good results. Happy hunting!

    • Dividend Empire Dividend Empire says:

      Thanks for the feedback Ricardo. I’m quite happy with the results. Can’t wait for the new ccc list to come out so I can run the screen again!

      Ken

  4. Awesome job Ken! A lot of good ideas here. I really appreciate you detailing your point ranking criteria.

    I have a somewhat automated ranking system as well. However, it isn’t polished enough for me to release to the public yet. It looks like we have a lot of similar methods though.

    Keep up the great work!

    • Dividend Empire Dividend Empire says:

      Hi DP – thank you for your feedback! My system is still a work in progress as well. I’m sure I will be fine tuning it for years to come. Looking forward to seeing your ranking system!

      Ken

  5. Kevin B says:

    Great article! I’m working on a system of my own and this is very helpful. Using Dave Fish’s list, I’m ranking by various factors and taking the top quintile to filter out the best. I usually end up with 12-15 from the Dividend Champions and 20-30 in the Dividend Contenders (the only two categories I work in). I import Dave’s spreadsheet into Filemaker Pro and have it do the sorting and scoring for me.

    My system is evolving as I felt I didn’t consider company fundamentals enough, just dividend metrics. I put a little bit about my system on my Seeking Alpha “instablog” if you are interested.

    Cheers & thanks again!

    • Dividend Empire Dividend Empire says:

      Thanks Kevin. My system is still evolving as well and I don’t think the evolution will ever end. I find it very difficult to include parameters for company fundamentals so I just do that manually once I reduce the CCC list to a manageable basket of stocks.

      I checked out your system and I really like it. We use a very similar system with the exception of your initial chowder rule barrier and including a beta parameter (both of which I am now considering – especially the beta).

      Thanks for stopping by and thanks for sharing your system.

      Ken

      • Kevin B says:

        Thanks for the reply – as for the beta, I found on http://www.suredividend.com/8rules/ that rule #5 made sense. I’m just still trying to track down the source. Cheers!

        • Dividend Empire Dividend Empire says:

          Cool Kevin – thanks for the link. I typically copy and paste the CCC list into Google Sheets to run my screens. This gives me access to the data anywhere and also has the benefit of the “GoogleFinance” formulas. I use this to get real time updates of stock price, PE ratios, etc and it also has a formula to grab the Beta numbers for stocks: =googlefinance(ticker, “beta”) . I think I might include this parameter in my next screen.

          Take care,

          Ken

          • Kevin B says:

            Back to the Beta ranking idea, I’m now not sure it’s such a great idea.
            Using Portfolio123.com, I did backtesting with the beta as the ranking criteria. A portfolio based on Beta ranking, from 1999 through today, would indeed beat the S&P 500 by a large margin — 3% vs around 10% on average.

            Strangely though, the stocks in the top 15% of the ranking performed much lower, for 85-90%, 90-95%, and 95-100% beta ranking, the returns over the period were 9.4%, 7.9%, and -5.8% respectively.

            Here’s a link to the chart.
            https://dl.dropboxusercontent.com/u/223529/seeking-alpha-reports/beta.png

            You are more math savvy than I. Perhaps you can make more of it?
            Cheers,
            Kevin

  6. Rich says:

    I’ve been trying to find the post that details how to create your automated criteria filter in google docs…can you assist me in this Ken?
    Excellent website Ken! Love the content and information. Im a numbers and analyst guy myself when it comes to investments. So I’d like to run a test on your processes for the next 12 months before hitting the green light on my personal capital, but thus far, I’m pretty happy with how it all works. Great work!

    • Dividend Empire Dividend Empire says:

      Thank you Rich! I’m glad you like the site and my method. I don’t actually have a post that details how I run the filters in excel / google docs – just this post detailing the ranking criteria.

      I would be happy to send you one of my excel files from a recent screen if you want. The way I run these screens is to copy and paste the CCC list into excel, add the functions / formulas for my screens, then sort all of the data by the final ranking number (this is the excel sheet I can send you).

      Once I have my final list I typically add the stocks to my watch list which I keep in google docs (google sheets). If you need help with the financial functions in google sheets let me know – I can help you out with that.

      If you would like a copy of the excel file let me know. I can send it by email on Monday since these files are on my work computer. Also please keep in mind that while this ranking system is mostly automated, I still manually dig deeper into each company before making my choices.

      I hope this helps. Please let me know if you need anything else.

      Ken

      • Rich says:

        Ken,
        I would greatly appreciate the spreadsheet with your filtering criteria. It will beat filtering out the best candidates manually! LOL

  7. Marcus says:

    Wow this is some great stuff! Seeing how its been two years since this post, how has your system evolved since? Do you have an update I missed somewhere?

    • Dividend Empire Dividend Empire says:

      Thanks! No, I basically use the same methods when choosing dividend growth stocks these days. The only difference is in my overall strategy. While the majority of my money is still in dividend growth stocks, I have taken more of a total return approach – adding straight growth stocks (that don’t pay dividends) to the mix. You can check out the “Moving Forward” section of my latest post for more details. I will post my 2017 Q1 updates soon as well.

      Take care,

      Ken

    • Dividend Empire Dividend Empire says:

      Sorry I forgot to mention one change to my ranking system – I now include Beta as one of my parameters thanks to Kevin B’s comment above.

      Ken

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