There are a great many investing strategies out there. GARP, momentum, value plays, etc. One of the most common is the desire to build an income portfolio. One that theoretically offers a dividend stream that is able to match, or preferably surpass, that of fixed income holdings. Therefore, I wanted to take a little time to look at a few criteria I would use to select such a portfolio, as well as the results that come from screening for such criteria. This will be a multi-part series.
In screening for suitable additions to the portfolio I sought out those matching the following criteria on ADVFN. I then cross referenced these on Morningstar.com:
- Dividend yield over 3%
Companies with a decent starting yield.
- Dividend covered at least 1.5 times
Net income is equal to at least 1.5x dividend.
- Return on Equity above 12%
The company passes some measure of quality.
- Debt to equity below 1.5
The company has a reasonable level of debt.
- A growing dividend
The dividend is growing or at least stable.
- A dividend payout ratio below 66%
The dividend looks to be sustainable. This ratio is preferably steady.
- A reasonable valuation (with regard to P/E, P/B, P/S etc)
To weed out any egregiously valued companies.
- Positive free cash flow
Further reassurance that the company is able to meet its dividend obligations.
Finally I weeded out those companies with inconsistent or unstable past performance. This resulted in a final list of 19 companies. A reasonable number with adequate diversification.
- 3 x Residential construction
- 1 x Apparel retailer
- 1 x Industrial REIT
- 1 x Leisure company
- 3 x Speciality retail
- 1 x Basic materials
- 1 x Auto Dealership
- 1 x Gambling company
- 1 x Business services company
- 1 x Food distribution
- 1 x Home furnishings company
- 1 x Home improvement company
- 1 x Footwear company
- 1 x Advertising company
- 1 x Electronic components
I will therefore break this series into four parts.
1. Bonmarche (LSE:BON)
Bonmarche Holdings PLC is a women value retailer. The Company is engaged in selling clothing and accessories to mature women via its own store portfolio, website, mail order catalogues and through the Ideal World TV shopping channel. (Morningstar)
- Yield: 7.2%
- Cover: 2.25
- ROE: 24%
- Debt to Equity: 0.10
- Payout ratio: 66%
Bonmarche have been a relatively recent listing and therefore there is little in the way of dividend history. Nevertheless, dividends have grown in each year since listing. The Payout ratio is a little high however, and a possible note of caution should be applied. Meanwhile, a yield of over 7% is tempting.
2. Bellway (LSE:BWY)
Bellway PLC is a is a holding company. It is engaged in the business of building houses in the United Kingdom. The Company provides bedroom apartments to luxury penthouses and executive houses. (Morningstar)
- Yield: 3.8%
- Cover: 3
- ROE: 21.5%
- Debt to Equity: 0.05
- Payout ratio: 31.5%
Bellway have grown their dividend each year for the past 7 years. With a generous amount of cover and a low payout ratio, there is an element of safety built in.
3. Big Yellow Group PLC (LSE:BYG)
Big Yellow Group PLC is engaged in the provision of self storage and related services. The Company has unrivalled portfolio across London, the South East and metropolitan cities with a network of 89 stores. (Morningstar)
- Yield: 3.3%
- Cover: 2.9
- ROE: 13.5%
- Debt to Equity: 0.4
- Payout ratio: 35.5%
Big Yellow Group have grown or held their dividend in each of the last 7 years. A somewhat bumpy historic payout ratio gives some cause for concern, though the previous four years have been more steady.
4. Character Group (LSE:CCT)
Character Group (The) PLC is engaged in the design, development and international distribution of toys, games and gifts. The Company operates in the United Kingdom and the Far East. (Morningstar)
- Yield: 3.1%
- Cover: 3.4
- ROE: 47%
- Debt to Equity: N/A
- Payout ratio: 35.8%
Dividends at The Character Group have risen or held steady for the past eight years. The payout ratio has been consistently low, indicating some strength in their ability to maintain dividend growth. They earn consistently high levels of ROE, as well as free cash flow.
5. Crest Nicholson Holdings (LSE:CRST)
Crest Nicholson Holdings PLC is a residential developer. The Company is engaged in designing and delivery of sustainable housing and mixed-use communities. (Morningstar)
- Yield: 4.6%
- Cover: 2.25
- ROE: 21.8%
- Debt to Equity: 0.4
- Payout ratio: 36.8%
Listed in 2013, Crest Nicholson Holdings have increased their dividend payout since they began paying them in 2014, with a consistently low payout ratio of around a third of after-tax earnings.
This ends the first part of my dividend portfolio series. Part 2 can be found here.
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