DGI Adventure – 11-21-2015 “High” Yield Quantitative Watch List

There are only six weeks remaining in 2015, and we have a
lot of capital still to deploy.

Limit orders for JNJ
and MMM
remain unexecuted in my wife’s ROTH IRA account as the share prices went pretty
much in the opposite direction of the price limits set. That represents about
$3,000 that’s allocated, but still uninvested. Do we aim for other targets,
raise the limits, or hunker down and wait?

Additionally I project current war chest cash + the next six
weeks of contributions to account for around $6,200 in unallocated cash by the
end of the year if no stocks are purchased. The taxable brokerage account is
sitting just shy of $15K and my goal for the end of the year was to have $20K
in it, so I’m right about on track assuming the right opportunities come along
between now and then. What opportunities might those be? It’s impossible to say
for sure of course, but I have a few ideas.

Now Presenting: The “High”
Yield Quantitative Watch List

This watch list consists of stocks yielding 2.5% or more from
David Fish’s CCC list
(Dividend Champions, Contenders and Challengers)
that pass 10 out of 10
quantitative screening tests. The screening criteria are:

1)     
0.5% DGR margin of safety – meaning the historic
DGR (8% max) is at least 0.5% higher than the current reverse DDM DGR implied
by the current share price.

2)     
Payout ratio in terms of earnings is less than
60% and/or payout ratio in terms of operating cash flow is less than 80%.

3)     
Current P/E ratio is less than 5 year average
P/E ratio

4)     
Current yield is greater than 5 year average
yield

5)     
5 year EPS CAGR is 5% or better

6)     
5 year cash from operations CAGR is 5% or better

7)     
5 year revenue CAGR is 3% or better

8)     
Either total cash of $1B or total cash is greater
than total long term debt.

9)     
Debt/Market Cap is 33% or less

10)  
Dividend cushion ratio is 1.0 or greater.

The idea is that if a stock meets all these criteria, it has
been growing over the last 5 years but for some reason is currently discounted
in spite of being financially healthy enough to maintain or grow its dividend.

Out of the over 700 stocks on the CCC list, 9 made this
watch list. Those stocks, listed roughly in order of yield/consecutive years of
dividends:

Stock #1 Helmerich
& Payne Inc. (HP) – Current Share Price: $54.73

Want to start a lively debate at your next cocktail party?
Tell people you want to invest in a US based oil & gas drilling contractor.
Okay the response might not be that dramatic depending on who’s at the cocktail
party, but if it’s anyone who’s paying attention to stocks right now, there’s a
good chance they might think you’re crazy. And maybe you are. But unlike any of
its competitors, HP’s 5% yield is backed by 43 consecutive years of dividend
increases and an extremely conservative balance sheet.

Stock #2 Cummins Inc
(CMI) – Current Share Price: $98.70

Boy it sure would suck if you’d bought CMI at $160/share in
June of last year. Based on the company’s 10 year DGR history (17.7% average
DGR), even that looked like a good deal. I don’t really know much about the
grand supercycle peak of the trucking industry, but diesel engines are pretty
damn useful, and Cummins makes some of the best.

Stock #3 Westwood
Holdings Group Inc. (WHG) – Current Share Price: $56.46

This small Texas based financial services company is
probably not on your radar. Maybe it should be. (Full disclosure: long 30
shares with a cost basis of $50.73/share)

Stock #4 Waddell & Reid Financial Inc.
(WDR) – Current Share Price $37.74

Another Midwestern financial services company. Hmmm…is this
a trend? I’ve never heard of them, but I’m excited to learn more.

Stock #5 National
Oilwell Varco (NOV) – Current Share Price $37.26

Referred to in the industry as “No Other Vendor”, this is
the slightly better known second half of the 1-2 oil & gas industry punch
that will liven up that cocktail party of yours. Warren Buffett recently sold
out his entire stake, so this is extra contrarian. Could be a fun ride.

Stock #6 DSW Inc.
(DSW) – Current Share Price $22.80

To
quote Jim Cramer
: “Shoes are in a bear market, and hand bags are in a bear
market. Okay? So just keep that in mind.”

Thanks, Jim.

Stock #7 HCI Group
Inc. (HCI) – Current Share Price $39.22

This is a very small Florida based insurance company.
Considering how special people are in Florida, one has to assume they’re pretty
savvy about evaluating risk.

Stock #8 Valero
Energy Corporation (VLO) – Current Share Price: $71.98

I’m actually surprised this shows up as so undervalued. The
logic isn’t revolutionary: price of oil sucks, so who benefits? People who buy
oil and refine it into useful things with relatively inelastic demand for a
profit. This seems like a no brainer to me.

Stock #9 T. Rowe Price
Group Inc. (TROW) – Current Share Price: $76.37

Only two Champions met the quantitative criteria for this
list. TROW sports an impressive streak of 29 years of dividend increases. Even
with the recent rally it’s still coming up as undervalued. Sure would be nice
if it dipped back into the mid to high 60’s again.

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