Watchlist: DOW Jones Dividend Cushion

I was looking at the different allocation percentages for our portfolio since I published the most recent “monthly update” and the amount of cash we’re holding right now is stupid. There isn’t really any other word for it. It’s one thing to have a little dry powder in case the market dips, but this is ridiculous. I clearly need to put a little more money to work in the market, but where exactly?

First of all, looking at the different accounts, the inherited IRA at interactive brokers (account #1 in the portfolio) is the obvious offender here. It currently has ~$130K in available cash, out of a rough account value of $200K and change. That is not how that account is supposed to be allocated.

There is currently only $37K tied up in individual stocks or options contracts. I’d like to have that number closer to $100K.

Which means it’s time to pick some individual stocks to write cash secured put options contracts against.

I usually go to Dave Fish’s CCC list as my “universe” when trying to filter down to a “watch list”, but this time I thought I’d shake it up a bit. I started with the DOW Jones Industrial Index. I did this because it’s only 30 stocks in total. I wanted to use free cash flow data as the primary filtering mechanism, and that’s really tedious for me to look up.

I’m working on a side project to make that a little easier, which is why the CCC lists are embedded as additional tabs in the 2017 Watchlist googlesheet. Stay tuned!

Anyway, I went to Morningstar.com and I got balance sheet and cash flow data for all 30 stocks in the index so that I could calculate my version of the “Dividend Cushion Ratio”.

TLDR: it’s my measure for dividend “safety” and it’s pretty conservative. A ratio greater than 1.0 is good.

In the past I used to get hung up when there was a big difference between the amount a company spent on Capex vs the total amount of “cash used for investing activities”.

For example a big acquisition, which falls under “investing activities” but not Capex, will skew the number. Presumably the acquisition will be accretive to cash flow, and offset the negative over the next 5 years, so maybe I should just leave it out?

But then again acquisitions are really the only way some of these bigger companies can expect to grow. For some of them, acquisitions are just as necessary of an investment as Capex.

So I guess I’m still hung up about it, but this time I just calculated the ratio both ways to highlight the difference. I like being able to see it this way.

I also calculated it using just short term debt in addition to total debt. The idea here is that the short term debt definitely needs to be paid and should be netted out of the current cash position. Long term debt might not have to be paid off in the next 5 years? I guess?

So all in all I calculated the dividend cushion ratio 4 different ways.

Most of the companies passed the looser, short-term-debt-only guideline, and I don’t think I’ll do it that way again (although it was interesting to see some stalwarts of the DGI blogosphere that failed even that…looking at you Chevron).

A total of nine stocks passed all four different forms of the calculation, which was more than I expected. Pertinent info of the nine winners is summarized in the table below:

Ticker

Yield (as of 07/06/17)

5yr Average Yield

Years of Div Increases (CCC Status)

3yr DGR

5yr DGR

“Market” DGR (10% Disc)

CSCO

3.78%

2.8%

7 (challenger)

15.1%

40.6%

6.22%

INTC

3.24%

3.2%

3 (froze in ‘14, no cut)

7.0%

5.95%

6.76%

BA

2.82%

2.3%

6 (challenger)

31%

21%

7.18%

WMT

2.70%

2.6%

44 (champion)

3.3%

7.3%

7.30%

JNJ

2.54%

2.9%

55 (champion)

6.7%

7.0%

7.46%

HD

2.34%

1.9%

8 (challenger)

20.9%

21.6%

7.66%

TRV

2.28%

2.2%

13 (contender)

10.2%

10.5%

7.72%

DIS

1.51%

1.3%

7 (challenger)

25.7%

30.1%

8.49%

NKE

1.26%

1.2%

15 (contender)

15.1%

15.6%

8.74%

What’s really surprising to me is that every single one of these stocks, except for JNJ, is trading at a discount to their historical 5 year average yield. So from that perspective they’re all at least fair to slightly undervalued.

But that’s not the only way to come up with a valuation. We like to discount future dividends around here, and INTC, WMT and JNJ stand out to me in that their historical DGRs are uncomfortably close to the “market” DGR. (“Market” DGR is what the dividend growth rate would have to be for the current market price to be “fair” using dividend discount modeling with a 10% discount rate…see my investment thesis process for more detail.)

Since most people seem to expect commentary with watchlists, here’s a blurb on each of these.

CSCO – Already own 244 shares, which isn’t quite a full position, but getting awfully close; I was planning to take it easy in case the price kept going down, but now I’m considering one more covered strangle if I can get the right price for the call.

INTC – Definitely the shakiest one on this list. I think there are other more interesting tech names for me that have a better dividend history. Probably a fine investment though…they never cut the dividend, just froze it. Is that so bad?

BA –  Absolutely love Boeing, but a little scary to write options against a $200+ share price. That is $20K on the line per contract. Maybe keep in mind as a ROTH IRA pick when those get funded for 2017.

WMT – Sold a covered call in April, it was assigned in May and I don’t regret it a bit. I think this valuation is streeeeetched considering what they’re up against (AMZN) over the next few years. Don’t get me wrong, WMT will be fine, but the dividend growth will be more like the last 3 years than the last 5. Needs a higher yield to pique my interest.

JNJ – You will probably always have to pay a premium for Johnson & Johnson. Someday I will break down and just buy some. Fortunately my wife picked up some shares back in February so the Wizards as a family are long.

HD – I’ve always kind of loosely kept an eye on Home Depot, but the share price has been skyrocketing the last few years, so I always kind of assumed it was too pricey. Huge discount to historical yield here thanks to latest increase of 29%. Mr Market hasn’t caught up yet I guess? Wow! Kind of a big share price for options though…

TRV – Insurance companies can have goofy financials, so I probably should give this a closer look through a different set of metrics before making a move, but I don’t own any insurance companies, so there’s always that.

DIS – The way people consume media is changing drastically, and I think Disney is probably on the right side of the change. As people get more picky about what they watch and the distribution platforms switch to more a la carte, the content producers will come out on top.

NKE – So what if the yield is low? Share price is in the sweet spot for trading options, so I can boost the income I earn, right?

So we’ll see what happens in the market, but don’t be surprised to hear these names in near-future trades on the twitter. Many of them would represent new positions, so a full-blown investment thesis write-up would be called for as well.

Are these stocks on your watchlist?

What do you think of my filtering method?

Want to just say something so that people will link to your website from your comment?

Rabble rabble?

 

2 thoughts on “Watchlist: DOW Jones Dividend Cushion

  1. A very thorough and detailed analysis, that’s for sure. I think how you took the time and performed a VERY detailed scrub of these stocks to narrow down your watch list further. Of the stocks, I’m watching CSCO and INTC closely. I have small levels of cash available right now, so I’m looking to make every dollar matter with each investment in terms of receiving a dividend check. However, each of the companies on you watch list are strong and you can’t go wrong with any of them.

    Thanks for the research!

    Bert

    1. Thanks Bert!

      You’ll definitely get the most bang for your buck out of those two tech titans. The yields are certainly the most attractive out of the list.

      I agree that you probably can’t go wrong with any of them. That is kind of the idea for me. If market conditions are favorable for any of these names, I feel like I can pull the trigger on any of them without second guessing myself, because I know the dividend is safe and likely to grow regardless of the short-term market sentiment.

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