11-06-2016, 08:16 PM
The signals I use come from my portfolio business plan. For the non-speculative portion of the portfolio:
- Stocks must pay a dividend and should have been paid at a higher annual rate for more than 5 years. Use the CCC list as a primary source for investment ideas.
- The P/E ratio for the trailing 4 quarters should not exceed 20. Additionally, it is preferable that the P/E ratio be less than or equal to the average P/E over the last 5 years. No more than 1 outlier may be excluded when calculating the average P/E. Be aware of non-cash charges to earnings when calculating the trailing 4 quarters earnings. These could be impairment charges or discontinued operations where little or no cash is involved with the expense. Add the non-cash charges back to reported GAAP earnings to get a better picture of profitability.
- Dividend yield at time of investment > 2.5% or 125% of the S&P 500 yield (whichever is higher). This excludes the Special Situation portion mentioned in the Tactics section.
- Dividend growth rate > 4% for the lesser of the 3, 5 or 10 year periods. Using the lowest rate of the three time frames should be a conservative estimate of future dividend growth.
- Payout ratio < 70% of free cash flow (EPS + depreciation – capital expenditures) for public corporations. For some investments, such as REITs and MLPs, a higher payout ratio may be allowed provided other financial factors are deemed adequate.
- Current ratio should be > 1.0 and the higher the better. Some companies have operated for years with a current ratio less than 1.0. This should be taken into account when analyzing a company's finances. Investigate cash flow, free cash flow and interest coverage to ensure the company can pay its bills and the dividend.
- Earnings Per Share (EPS), or Funds From Operations (FFO) in a REIT, increasing at a Compound Annual Growth Rate (CAGR) > 3% over the last 5 years.
- Debt/Total Capitalization < 50%. Utilities, REITs and MLPs may exceed this due to the nature of the business. In this case, Debt/Total Capitalization can be up to 100% but do investigate debt maturity dates to ensure they're spread out over the long term.