Creating your own scorecard for Dividend shares.

14th Sep by Don`t let the tail wag the dog

10 comments 553 reads

•Introduction

•Stockopedia has a value score for those who wish to buy cheap shares, a quality score for those who want to buy good companies and a momentum score for those who want to buy shares whose price and earnings are rising. The purpose of this thread is to see if I can come up with an income score to assess the merits of income shares.

•The idea originally comes from Charles Carlson`s book “The Little Book of Big Dividends” but I`ve tried to modify his criteria to the Stockopedia platform, as thanks to the Stockopedia team we already have a simple way to assess companies strength and that`s through the quality, value and momentum ranks.

•Like Charles Carlson, I consider dividends should be assessed on three criteria- the yield, the dividend growth and the dividend cover.

•Finally I personally think there are four other edges which I think I can incorporate into my analysis- prospective growth prospects, is the company meeting expectations, the state of the general market and whether the company`s sector is in favour or not. The last 2 are technical criteria which suit me but may not suit everyone.

•I have tried to come up with a score for each section trying to reflect the importance I place on each component. Everyone will probably attach different importance to each value, depending on their style of trading. I have started backtesting my ideas, but would welcome any feedback, as its not the finished article yet.

The Ranking scores

The best place to start is probably the ranking scores, as I feel they are an objective number which assess most shares in the market based on a set of 6-9 different criteria. Stockopedia have proven that high rankings outperform lower rankings, so there is an edge here. Specifically I personally prefer to use quality, value and momentum scores separately rather than the stock rank score for two reasons. The combined three scores tends to be less extreme than if you use one stock rank score. For example if a stock is ranked 99, it probably has two scores in the 90s and one below 90. The average is less extreme. Secondly if I use three scores I can weight them to reflect the type of trader I am. I find it hard to value stocks, so I would give more emphasis to quality and momentum. So for…

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abtan

14th Sep

Thank you for sharing - I found your thought process and the strategy most interesting.

I like "safe" yields, which I hope will provide a stable foundation for the rest of my portfolio over time e.g. Big Yellow (LON:BYG) , Macfarlane (LON:MACF) .

My position size for these companies is usually quite small.

Most of my cash generally goes into companies that I think are unnecessarily cheap, irrespective of whether they pay a dividend or not (although a dividend does help me be wrong for longer.)

My hope is that these cheap companies will materially re-rate within a couple of years e.g. SDI (LON:SDI) Watches of Switzerland (LON:WOSG).

If my analysis is correct, then a 50%-100% increase in share price over 2-3 years is of course > many years of a growing 3% dividend.

Thanks again

Graham Wells

15th Sep

Thanks for a brilliantly written and well researched post!

Have you considered looking at, and accommodating ‘compounding’ into your results? I think compounding, especially in cases where the dividend is higher, ie, 8-10%+ means that earnings in a company where the share price stays the same will cover the investment cost within 10 years (not accurate figures but you get the gist). This means the investment will have at least doubled in value or even more if the SP increases. I know that SP can be sluggish or not grow significantly in cases where the dividend is very high but is doesn’t mean that these companies are poor investments and in cases where the SP does quite well, the company can multi bag! Which at the end of the day, makes a massive difference to a portfolio.

On another note,

There was a company stated recently, that had over a long time (possibly a couple of decades) returned a huge amount of money and the most to investors. Probably through dividends and share buybacks that was really surprising and not something that the average investor would realise or look for. A company that had definitely flown under the radar. I don’t remember the name of the company but hopefully someone reading this will be able to remind us. These type of investments are not considered sexy enough for a lot of investors but as it’s all about investing to grow the portfolio value as much as possible over as short a time as possible, some of these investments are vital for a successful approach to growing your wealth and fortune.

Graham.

Don`t let the tail wag the dog

Thanks for your reply. I was worried my article was a little too detailed, but my hope was that people would find something useful amongst the different sections. Its interesting that you say you look for safe yields, which for Macfarlane is certainly the case as dividend cover has been consistently over my maximum 2.5 for years. However the recent forecasted dividend growth for Big Yellow is not currently showing on the forecast dividend cover figures. I tend to take the average dividend cover for the 2 forecast periods, which for Big Yellow is 1.24, though this may need increasing as the cover previously was between 2 and 10. Forecast EPS may be wrong or not updated, so the cover may be fine. Ultimately the price chart for Big Yellow is fine, the dividend growth is great, so it looks quite safe. Finally the Real Estate sector is very strong at the moment. I just would like higher Stockopedia numbers for these stocks, but that`s just me.

Thanks for the reply Graham. No I haven`t included compounding in this research. I`ve probably over complicated things already with all the different sections I`ve included, but obviously compounding is a hugely important factor in regard to dividend investing.

Have no idea which company you are referring to. Would be interesting to find out. But in the last decade Games Workshop has paid a huge amount back to investors in regular dividend payments. Its predicted to pay out 418p next year, whilst its share price at the beginning of 2017 was just 729p.

16th Sep

Big Yellow (LON:BYG)

Hi again DLTTWTD

Yes, agreed, the Stock Rank is not remarkable here at "only" 70 and the Value Rank is a low "40".

As I mentioned, I see it as a foundation for the rest of the portfolio - something safe that I don't need to worry about and which should grow quietly in the background.

I have only held for about 2 years now and the IRR on the investment is 13% (including dividends), which is within the range of what I would hope to achieve anyway.

As for the dividend cover, 1.24 seems about right, but I'm not too worried given the significant asset backing and highly recurring revenues.

For additional context, I'm forecasting 5%, 5% and 7% growth in FCF over each of the next 3 years respectively based on what we have been told about expansion plans. That should provide sufficient cover for dividend growth, at least for a few years...hopefully.

Alphaflight

Hi Graham Wells,

"There was a company stated recently, that had over a long time (possibly a couple of decades) returned a huge amount of money and the most to investors. Probably through dividends and share buybacks that was really surprising and not something that the average investor would realise or look for."

I believe you are thinking of Philip Morris International (NYQ:PM)

The best performing stock in terms of total percentage return over the life time is Altria Group (Philip Morris International (NYQ:PM) ) . An investment of $1000 in 1925 turned into $2.5 billion (if you reinvested the dividends back into the company). Number 2 in US history is Vulcan Minerals (CVE:VUL) ...

Sharepad says Big Yellow is a real estate investment trust, so maybe this is affecting their dividend cover as I`ve heard REITs are obliged to distribute 95% of their profits to dividends. So maybe this is why the dividend cover is low. But previously it had huge dividend cover, so don`t completely understand this. I think there are some issue with my methodology and REITs, but then I think there are issues with any data collecting system as they can never create something which covers all different types of shares.

Thanks for this piece of knowledge- it makes sense to me but I dont know which company Graham was thinking of.

Thanks Alphaflight for the reply,

Philip Morris International (NYQ:PM) may well have been the share I heard about but I can’t remember. But all the same, that’s some return on $1000 over time!

I think I also read somewhere recently that £1000 invested in Octopus energy would now be worth £180,000 since they have been in existence. But I can’t find them on Stocko’ and can’t remember where I saw it.

Just goes to show how much can be made if invested in the right place and held for a very long time. I heard on a podcast today, someone commented on a professional investor who said ‘investing in a company should be like watching paint dry or watching the grass grow’, ‘if you want excitement, take $800 and go to the casino!’ The idea behind this is that you should be investing in the right companies for a very long time and not itching to keep do something. All fine if you can find a company that continues to grow year on year!

In reply to Graham Wells,

The podcast I mentioned earlier referring to investing in companies for a very long time ‘like watching the paint dry or grass grow’ is below. It’s American commentary and mentions more about USA companies and investors but the idea of ‘Value Investing’, which is the ethos and style of investing, that the podcast is all about. think it’s very interesting.

https://podcasts.apple.com/gb/...

Creating your own scorecard for Dividend shares.

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Don`t Let The Tail Wag The Dog

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