DividendsI just read, with great interest, “Calculating Intrinsic Value With the Dividend Growth Model,” by Z. Joe Lan in the recent AAII Journal.  It was the kind of piece that helps one determine whether s/he is buying a stock at a fair price.  It used factors such as dividends for the coming year, risk-free rates, market risk premiums, and beta to determine whether one is overpaying for a stock.  For number jockeys, it was wonderful.

There were a few requirements for a stock to be considered:

  1. The stock had to pay a current dividend
  2. The stock had to have a positive dividend growth rate
  3. It was recommended that it be sufficiently large enough

I added a few extra criteria, most based on Harry Domash’s early bullet-proof screen:

  1. The company had to have a minimum market cap of $2 billion
  2. It had to have positive earnings
  3. The current ratio had to be greater than 1.5
  4. The debt to equity ratio had to be less than 0.4

I made a few assumptions that differed from Mr. Lan.  First, Lan assumes a market premium of 9.9%.  I look at things a bit more conservatively, and assumed a market premium of 8.892%.  Additionally, Lan assumes a risk-free rate of 5.7% based on the average return of the 30-year treasury.  Again, I am a bit more conservative, and assumed a risk-free rate of 4.681% based on the average return of the 10-year treasury.  I feel comfortable with this, since my assumptions are based on averages dating from 1871.

With all that, these are the dividend paying stocks that show a positive margin of error.  I do not have any financial stake in these.  The beauty of creating a watch list, is to determine whether an idea works over time, without investing any of your personal capital.

Company Name Ticker Beta 5 Yr Hist. Div. Growth %  Dividend    Last Close   Target Price  Margin of Safety
ANALOG DEVICES ADI 1.17 14.1               1.32             50.68               134.20 167%
CHEVRON CORP CVX 0.96 10.3               3.90           115.07               142.19 27%
ERICSSON LM ADR ERIC 0.91 11.1               0.29             12.82                 19.11 51%
EXPEDITORS INTL EXPD 1.13 13.8               0.60             38.89                 67.44 75%
CORNING INC GLW 1.66 19.5               0.39             19.13               434.96 2176%
INTEL CORP INTC 1.02 13.3               0.90             24.70               190.73 676%
JOHNSON & JOHNSON JNJ 0.53 7.5               2.59             93.93               143.00 55%
LANCASTER COLONY LANC 0.51 8.9               1.52             95.83               473.08 395%
OCEANEERING INT OII 1.71 19.8               0.84             70.24               369.55 427%
PARKER HANNIFIN PH 1.51 16.7               1.70           119.83               130.30 10%
PALL CORP PLL 1.3 15.4               1.21             87.59               151.73 75%
V F CORP VFC 0.9 11.5               0.92             62.33                 82.64 34%
XILINX INC XLNX 1.17 14.0               0.88             52.91                 87.27 67%

Keep an eye on these, and happy investing.



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