by KenFaulkenberry

Dividend Stock Valuations

On the 1st of January I launched Arbor Investment Planner’s  second model portfolio: the Arbor Dividend Portfolio (ADIVP). This is a real-time portfolio funded with my own money; it’s part of my personal retirement.

In general, quality dividend growth stocks are expensive. The two bear markets between 2000 and 2009 taught investors to look for quality. In addition, investors have been enticed by artificially low interest rates into riskier assets (i.e. dividend stocks instead of CD’s).

I believe investors who purchase dividend index funds at current prices, and hold them for 10 20 years, can expect to make little or no returns. History tells us this. Valuations will eventually revert to the mean. This means despite earnings and dividends being higher in the future, the price of the stocks may be lower. That is what happens when you buy at too high a price; your long term returns will be low.

This is why I’m excited about starting the Arbor Dividend Portfolio (ADIVP); even though quality dividend stocks may be overvalued. Just like the AAAMP (my flagship portfolio) this new portfolio will be positioned to help investors navigate a treacherous investment environment.

Now, maybe more than ever, dividend investors need to consider value, margin of safety, and asset allocation in dividend investing portfolio management.

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If you would like a free copy of the inaugural issue send me an e-mail at kenfaulkenberry@aaamp.com with FREE ADIVP in the subject line.

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Objective of the Arbor Dividend Portfolio

The objective of the Arbor Dividend Portfolio is to provide an easy to follow dividend portfolio management guide for the self-directed investor. The ADIVP portfolio is aimed at 1) Benjamin Graham’s Defensive Investor. (but with a twist), and 2) the aggressive investor looking for dividend growth opportunities that have been screened for both quality and price (value).

The defensive investor is a conservative investor who seeks a portfolio that requires minimal effort. The twist is, I don’t believe the defensive investor has to accept an average rate of return. The ADIVP will attempt to achieve better than average long term returns through stock selection and asset allocation.

Asset Allocation

The ADIVP will vary the asset allocation to equities between a minimum of 50% and a maximum of 100% to dampen portfolio volatility. This flexibility has been the key to the AAAMP’s successful long term performance record.

When long term risk is high due to high valuations (and low dividend yields) the portfolio will maintain an asset allocation in equities toward the low end of the 50 -100% range.  When long term risk is low because prices are bargains (and dividend yields high) the portfolio will maintain an asset allocation in equities toward the higher end of the range.

Individual Dividend Stocks

The new portfolio will hold a mix of quality dividend paying stocks and bonds/cash. It will own between 12 and 24 stocks that I believe offer the most value compared to its price. In other words, quantitive (valuations) metrics as well as qualitative metrics will be a large factor in stock selection.

At least 75% of the stocks in the portfolio will consist of companies that have paid and increased their dividend for a minimum of 10 consecutive years.

Keep in mind there is no perfect checklist. However, I have developed this 29 point checklist of quantitative and qualitative metrics as a starting point to identify stocks worth considering for a high quality dividend portfolio.

29 Point Quantitative and Qualitative Dividend Stock Checklist:

Dividends (3 points)

Dividend Yield = > 2.0%

10 Year Dividend Per Share *CAGR > **4.14%