It’s time to show you my value stocks and dividend stocks watch list
I’m long overdue for beginning a monthly lowdown of my UK dividend stock watch list. Every month, I go through a list of FTSE 350 value stocks and dividend-paying stocks. I start off with all 350 stocks, and I rank them in different ways in order to whittle down the numbers towards a lower amount by following a set of criteria. This helps me review what is going on in the UK stockmarket, as I see the ups and downs of every stock’s data. I can then choose stocks that I would like to research more, in order to invest, but first I have to get rid of those that I probably wouldn’t like to invest in. I start the process by ruling out:
- Stocks that don’t pay dividends (you need to give me something back, mate! I’m trying to earn passive income here! Dividends are one of my strategies for wealth a new income stream I’m trying to build up alongside my p2p lending);
- Stocks with a PE of over 20 (expensive – I’m a cheapskate and always will be!);
- Stocks with a PE of less than 7 (value trap? too good to be true?);
- Stocks with a dividend cover of less than 1.5 – I prefer to buy those with a 2 upwards, equivalent to a 50% payout ratio;
- Stocks that have less than 7 years’ increasing dividends (unless the company has a wide ‘moat‘);
- Stocks I find morally incompatible with my beliefs (tobacco, gambling, sugar – yes, sugar! Bye-bye Tate & Lyle!);
- Stocks that are facing some kind of legal issues or suspected fraud (e.g. Tesco, Serco);
- Stocks that have not increased their dividend by at least 2% per year (my default inflation figure, although I sometimes ignore this if the company has a wide moat).
How I rank my value stocks and high dividend stocks watch list
I order my remaining companies into an edited value stocks and dividend stocks watch list. This is done in various ways, e.g. highest dividend yield, highest dividend cover, lowest PE, and any which way I feel like… but basically, once I’ve deleted stocks according to the 8 criteria above, this doesn’t leave many left. Funnily enough however, it leaves rather a lot more FTSE 250 companies compared to FTSE 100 companies. There are usually less than 10 FTSE 100 companies left in my list, and maybe 20+ FTSE 250 companies. I’m not really sure why this is, but I did notice that many of the FTSE 250 companies have usually got much more dividend cover, so perhaps they are just more conservative, or they have lower costs or something. Who knows?
Things to consider when buying stocks
There are other things to consider before I dive in. For example, what is the ROCE (return on capital employed) of the stock? Do they have have a history of decent ROCE, or has it been choppy? What’s their cash flow like? Does the stock look too good to be true? If it looks too good to be true, it could be what John Kingham (a UK investor I respect) calls a value trap. Has some new technology come along that might make the company irrelevant in a few years? There are, of course, many more questions one could ask, but they vary form person to person. Some people like to set a minimum dividend yield, but I tend to think in terms of quality. However, I do like to make sure that the yield is above inflation, just because otherwise I am losing money after inflation’s greedy money-eating effects, grrrrrr!
Other points to think about – Firstly, I don’t like to be too harsh with stocks, e.g. Royal Dutch Shell, a high-yield dividend and value stock actually cut their dividend a bit a few years ago, but I feel that they are strong enough as a company to keep providing me with a decent income. The yield is always pretty high, so a slight cut would not phase me too much. Sure, oil has taken a beating of late, but Royal Dutch Shell also have a huge part of their business coming from natural gas. There are also problems in data-gathering, in that sometimes my data may not be 100% accurate. This is why the list I compile is just a beginning for me to research into the stocks further. One of the problems you may come across is when using different data sources to get information on stocks, sometimes the data varies. For example, my data would show that WPP does not have a 7 year increasing dividend history, but other websites do… this is something myself and Dividend Life have discussed, when trying to compile the UK Dividend Champions List.
So, what does my dividend stock watch list look like for January 2015?
January 2015 Value Stocks and High Dividend Stocks Watch List
|Epic||Name||Sector||Yield||Div. Cover||02/01 P/E|
|ADN||Aberdeen Asset Mgmt||Financial General||4.15%||1.80||13.4|
|BG.||BG||Oil and Gas||2.27%||4.50||10.6|
|ITRK||Intertek Testing||Support Services||2.01%||3.00||16.8|
|Epic||Name||Sector||Yield||Div. Cover||02/01 P/E|
|AMEC||AMEC||Oil and Gas||5.03%||2.10||13.1|
|DNO||Domino Printing Sciences||Electronics||3.49%||1.80||18.6|
|FSJ||Fisher James||Indust. Transport||1.75%||3.30||17.8|
|MCRO||Micro Focus Int.||Tech/Software||2.74%||2.30||16.9|
|SGC||Stagecoach Holding||Travel & Leisure||2.66%||2.70||14.2|
|SXS||Spectris Ord 5p||Electronics||2.10%||3.10||15.8|
|ULE||Ultra Electronic Hdgs||Aerospace||2.39%||3.00||14.1|
|WG.||Wood||Oil and Gas||2.52%||3.50||12.5|
As I mentioned above, for some reason, there are always way more value stocks and dividend stocks on the FTSE 250, compared to the FTSE 100. Also, I’ve left JD Sports on the list, even though their PE is below 7, once again, this is something where data conflicts. Plus, since I own JD Sports and bought them at a good price, I like seeing them on there 😉
So, what stocks are on your watch list for this month? Do any of them match mine?!
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