Battle Loyal3: Round I Screening

I have finally been paid enough dividends in my Loyal3 account to purchase some shares.  Loyal3 is a fee free brokerage that allows an individual investor to purchase partial shares with as little as $10.  This enables someone who can only save a few dollars at a time to invest in high quality companies.

Setup

How do they offer fee free trades?  Loyal3 keeps their costs low by batching as many trades as possible before execution.  How does this work?  Suppose you, our ten best friends and myself all place an order for Coca-Cola(KO) tomorrow.  Loyal3 will take all of our money, plus some other peoples and at some time over the next few days buy shares of KO.  Lack of execution speed is the cost of being free.  In addition to this restriction, you can only invest in about 53 companies at the moment and purchase a total of $2500 per stock each month.  You can fund the purchase with either a credit card or bank account.  If you use a credit card you get an instant discount depending on your rewards.

Purchase Criteria

The following criteria will be used to filter the less appealing payers from the list:

  • Dividend growth of three years minimum.
  • Dividend Yield greater than or equal to 2.5 (reasonable yield)
  • PE Less than 20 (protect against overvaluation)
  • Payout Ratio less than 60% (I want room for the dividend to grow).

The most important criteria that a position can have is the desire to create shareholder value through dividends.  This unfortunately cannot be describe in terms of metrics, but in terms of action.  A history of raising the dividend is one action that demonstrates this commitment.  However, this act in and of itself is a bit misleading.  It is great to own a company that has raised dividends for so long, but that is merely an example of what could be.  Still a company with a history of raising dividends will hopefully have a culture that continues regardless of who is running it.

Fortunately, those of us investing over the last decade have been through good and bad times.  The recession weeded out the weak and gave companies the opportunity to demonstrate their commitment to dividends.  This is a valuable demonstration of whether they were committed to dividends and creating shareholder value without extreme methods.

Candidates

I have provided a table of all the dividend payers in L3.  Included is some additional information that will enable us to eliminate those that do not meet our entry criteria.  The table is rather long and includes 38 different companies.  The data in this chart is provided by Google Finance, it may be a little old. It is sufficient for this exercise though.

TickerPriceDiv/shareYield (%)Growth StreakPEPayout Ratio
FOX30.970.250.81%113.7111%
ANF37.840.82.11%222.648%
AEO12.120.524.29%028.54122%
BUD104.253.022.90%412.5536%
AAPL537.4612.22.27%313.3330%
BBY25.730.682.64%313.0234%
ATVI20.250.190.94%421.4120%
BKW25.930.281.08%239.743%
KO38.821.223.14%5220.464%
DIS78.480.861.10%421.5224%
DPS53.721.643.05%517.5654%
DNKN48.910.921.88%236.0368%
FTR5.540.47.22%049.97361%
GPS39.880.882.21%914.5732%
HSY102.771.961.91%428.3854%
K61.761.842.98%912.4637%
HAS54.511.723.16%1125.2480%
INTC25.310.93.56%1013.4348%
KSS56.51.562.76%313.9639%
MAT39.431.523.85%515.2259%
MCD96.163.243.37%3817.3158%
MSFT39.361.122.85%1114.5441%
LB561.362.43%018.344%
M58.411.71%614.9826%
MDLZ34.210.561.64%126.6144%
NKE73.320.961.31%1224.7532%
PEP82.542.623.17%4219.161%
PVH123.080.160.13%070.69%
RL156.981.81.15%519.3422%
SBUX73.41.041.42%4567.98805%
TGT59.741.722.88%4619.4256%
UL41.61.43.37%518.2361%
TWX63.471.282.02%416.7934%
VFC60.861.041.71%4122.6839%
VIAB841.21.43%116.2523%
WWE27.350.481.76%0756.151327%
WMT76.141.922.52%4015.6940%
YUM73.21.482.02%1031.1563%

First thing to notice is that all of these companies are in the Consumer Goods category.  The exceptions being AAPL, INTC, MSFT and FTR.  I would have added diversification to the list above, but that is a relatively futile exercise here.  This is okay, as my accounts work together, so I will just buy other sectors to balance this out.

Let the filtering begin!

The following stocks will be removed because they fail to meet any of the criteria above.

DNKN, WWE, SBUX, YUM

A few takeaways from this bunch.  First, I didn’t realize that the World Wrestling Entertainment (WWE) paid a dividend, but it feels appropriate for them to have a gigantic PE! I am a little surprised at Starbucks (SBUX), I followed (and owned, sold last year) them for years.  After reading the 2013 annual report, SBUX had a $2.25 per share pretax charge relating to some litigation with Kraft.   After adjusting for this accounting change SBUX has a high PE, but a reasonable payout ratio.

Next, I will remove any stocks that do not have a history of raising dividends by at least three years.

AEO, ANF, FOX, FTR, LB, MDLZ, PVH, VIAB

These companies either recently initiated a dividend or have held the payout steady.  A steady dividend is better than no dividend IMO, but there are plenty of quality companies in each industry that have a habit of raising their dividends.

The following companies are being excluded due to their drastically low dividend yield.

 ATVI, BKW, DIS, GPS, HSY, M, NKE,  RL, TWX, VFC

I was surprised to learn that so many clothing companies pay dividends.  Some of them are relatively high (American Eagle Outfitters (AEO) and the GAP (GPS)), while others are low (Ralph Lauren(RL) and Nike (NKE)).  There is even one that has payed dividends for 40+ years in VFC Corp (VFC).

Having the capability of raising a dividend is one of the most important characteristics.  The following companies have a higher payout ratio which may limit the ability to raise dividends and make them less secure.

HAS, KO, PEP, UL

A couple of these positions have a higher payout ratio because they recently raised their dividends and we are using the prior years EPS and not the upcoming years.  With this in mind, I may not necessarily kick these positions out depending on what is discovered with the remaining stocks.

The remaining candidates

At this point in time, we have 12 remaining companies.  

AAPL, BBD, BUD, DPS, K, INTC, KSS, MAT, MCD, MSFT, TGT, WMT

In the next round, I will be looking a little bit deeper and attempt to whittle this number down to three companies or less.  This may seem like an excessive exercise for investing 50 to 60 dollars, but I feel like it is worth it.  I have additional funds to invest and I may uncover a hidden gem among these and at a minimum find some candidates for further research.

Watch list additions

Even though the following didn’t make the cut this time, I will be adding them to my watch list for future research:

GPS, VFC

Summary

This has been an interesting exercise.  I have uncovered some previously unknown dividend payers and then eliminated them based on some of the more basic criteria I am interested in.  In part 2, I will look a little deeper into each position and attempt to reduce the number further.

Disclaimer: Long KO, PEP, MCD, MSFT, INTC, K, HAS, MAT, TGT, WMT, DPS, UL 

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4 Responses to Battle Loyal3: Round I Screening

  1. Not a bad little exercise to go through each time you want to invest. Since most of the information doesn’t change every day, it should be easy to maintain a steady watchlist and tweak those that don’t fit based on the more frequently changed information.

    • ILG says:

      That’s a good point writing2reality. I kinda have a watch list that I maintain, but deciding which is the best at the time is something I am working on. With this exercise, since I want to keep the dividends in the account, it limits the choices and will hopefully help me achieve the best outcome.

      Thanks for stopping by!
      ILG

  2. Loyal3 sounds great and once things settle down a bit I’m going to probably sign up for an account to earn extra CC rewards and DCA into some positions. I was surprised to see some pretty good DG companies out of their group of companies and I hope they can continue to add more.

    • ILG says:

      Hi JC,

      You can make a pretty solid portfolio from what in L3 at the moment (MCD,KO,PEP,MSFT) and a few others wouldn’t be a bad place to start!

      I am interested in seeing if their Social Stock Plan takes off and how companies will use it.

      ILG