Week 214 - “Buy-and-hold” Candidates Among Dividend Achievers

Situation: You want to research stocks that might be good long-term holdings for your retirement portfolio. But “buy-and-hold” investing is tricky, even for Warren Buffett. So, you’ll need to start strategizing with a few constraints in mind. For example, you don’t want to invest in companies that are primarily capitalized with bank loans or bonds issued by the company. Why? Because there will come a time when the rate of interest that has to be paid is higher than the rate of earnings growth, and the firm will no longer be able to get loans at attractive interest rates. The company might try to reduce its debt by selling off some assets or issuing more stock. But chances are they’ll be bought out by a competitor or Private Equity fund, and then be “right-sized.”  

Mission: Arrive at a spreadsheet of “buy-and-hold” candidate stocks by screening the 2015 Barron’s 500 List of the largest companies by revenue that are listed on the New York and Toronto stock exchanges. Start with companies that have raised their dividend annually for at least the past 10 yrs, i.e., the companies that S&P calls Dividend Achievers. Screen out companies with S&P bond ratings lower than BBB+ and/or S&P stock ratings lower than B+/M. Then screen out companies that are capitalized mainly by debt, and companies that have underperformed our benchmark (VBINX at Line 32 in the Table) on a risk-adjusted basis (i.e., Finance Value in Column E of the Table) since the S&P 500 Index reached a peak on 9/1/2000. 

Execution: The 2015 Barron’s 500 List has 98 Dividend Achievers, and 72 remain after screening out companies that don’t have S&P bond and stock ratings suitable for a retirement portfolio. After eliminating 30 companies that have a debt:equity ratio higher than 100%, and 18 that don’t have a Finance Value that beats VBINX, we’re left with 24 companies for you to consider (see Table). Two of those were excluded because they grew dividends at less than 3 times the rate of inflation over the past 16 yrs, which was 2.3%/yr (see Column H in the Table). Twelve of the remaining 22 have less risk of loss in the next bear market than the S&P 500 Index (see Column T in the Table), according to statistical projections available at the BMW Method website. Two have a statistical risk of loss, i.e., more than 2 Standard Deviations below trendline, that exceeds 40%; both have been excluded. Columns R and S in the Table also provide BMW Method data concerning 16-yr growth rates and current price trends for each stock. Every one of the 20 remaining companies beat the S&P 500 Index over that 16-yr period (see Columns C and R in the Table).

Bottom Line: It is almost impossible to find a stock that will outperform the S&P 500 Index on a risk-adjusted basis, and also pay you dividends in retirement that grow faster than inflation. But if you want to stretch beyond index fund investing, you need to try finding such stocks. We’ve come up with 20 candidates that beat the S&P Index since it peaked on 9/1/2000. These twelve have less risk of loss in a future bear market than the S&P 500 Index: WMT, HRL, ABT, NKE, GWW, CB, JNJ, ES, CVX, XOM, NSC, PG.

Risk Rating: 5

Full Disclosure: I dollar-average into ABT, NKE and JNJ, and also own shares of TJX, ADM, HRL, CVX, WMT, XOM, and PG.

Note: The Table is current for the Sunday of publication; metrics highlighted in red denote underperformance relative to our key benchmark, VBINX.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com