I’ve been noodling over a post published by FerdiS over at DivGro for awhile now, essentially weighing the pros and cons against my biases to figure the most appropriate rebuttal. In a nutshell, the post first grabbing my attention was his Recent Sells. Within this piece was the comment, “I … rank my … stocks by quality score and by CDN” and on this basis eliminated two holdings.
I am a proponent of every investor having a defined methodology within their comfort zone to determine the quality of their portfolio and various bloggers regularly publish their screening mechanisms and processes. Conversely, I don’t shy away from highlighting perceived frailties in these. A combination of Yield, Rising Payout Streak, PE Ratio and Payout Ratio are the most common attributes used by several bloggers while adding others to customize to their tastes. One example being the Dividend Discount Model.
Back in 2013, I’m not sure Simply Investing anticipated the record bull market coupled with inordinately low interest rates. Using KO as an example, his method would have classified it as overvalued. A changing business – while looking backwards (bottler spinoff) – doesn’t neatly fit this model. On the other hand, forward looking views, such as the DDM, have a basis in a series of assumptions. Even the Diplomat’s approach – which is arguably the most straightforward – has an assumption set within the metric, Dividend Growth Rate greater than the rate of inflation, allowing for management discretion (not a major issue in a low inflation environment).
FerdiS method – while thoughtful and elegant – has some limitations and could be viewed as an advertisement for premium services. Value Line, S&P, Morningstar and Simply Safe Dividends are the source data. S&P data can be obtained free and Morningstar through some brokers (otherwise $199/year). Simply Safe Dividends runs $399/year and Value Line $598/year.
Beyond the fees, the results are only as good as the dataset can generate. Mindful that I only performed a spot check against my portfolio, it appears Morningstar applies no moat to financials and narrow to utilities. As to the other providers – your stock has to be within the universe they cover. My assumption is the 80/20 rule applies here with limitations to small caps and foreign issues as these are not widely held by US investors.
As my preference is to get the investing view from the rear view mirror (ala, what have you done for me lately), all the metrics this model uses are forward focused based on analysis by an individual or algorithm. The final note being the use of the CDN (Chowder Rule) as Sure Dividend makes a compelling case of its unreliability.
A comparison would be incomplete without peer review. KO scores 23 of 25 on the modified DVK scale whereas the Diplomats and Dividends Diversify consider it overvalued. For my part, KO is a small (<1%) position that I’m not adding to other than dividend reinvestment. Kind of makes me wonder …
Bottom line: I’m not sure of the value of this – at least to me. But in my spare time I’ll continue plugging my portfolio into the model to ascertain whether this assessment is correct. I do, however, like the jigsaw puzzle of his methodology but can’t help but wonder if this is a prelude to even further premium offerings being rolled out …
Disclosure: Long MORN, VALU, KO