Top 40 Dividend Stocks for 2011--Progress Report

I have completed what I call Stage 1 work on The Top 40 Dividend-Growth Stocks for 2011. This work consisted of the following:

• A complete re-write of the text. I made two major changes to the text this year. First, I condensed my 5-article series on retirement funding into a single new chapter for the book. I incorporated a few additional ideas that came to light in the comments I received on the original articles as well as further thinking I have done on the topic. Second, I combined two chapters (formerly called "What Are Dividends?" and "Why Invest in Dividend Stocks?") into a single new chapter, "Why Invest in Dividend-Growth Stocks?" I did this to eliminate redundancies and try to create some space for the new chapter on retirement. The 2011 edition will contain about 17 more pages than 2010's edition. As usual, I also tinkered with the stock-scoring system. I bumped up the points available for a company's Story from 10 to 15 to reflect how important I think every company's business model and competitive position are. I changed the "look-back" period for dividend growth rates from 3 years to 5 years. I tightened the standards for Stock Valuation a little. I am more consistently using the phrase "dividend-growth stocks" instead of "dividend stocks" to emphasize the focus on companies that increase their dividends every year. That will also be relected in the title of the book itself.
• I completed the most tedious part of the whole project, which is reviewing more than 700 companies to select those that have any reasonable chance of being selected for the Top 40. There are 6 initial tests I put these companies through, including minimum yield, minimum yield growth, minimum number of years of increasing their dividends, and the like. This year's Stage 1 processing took 708 stocks and eliminated 572 of them. So 136 stocks remain for Stage 2 testing, which will begin immediately. Because I start testing stocks so early (in September), I use "eased" requirements that allow some stocks to pass forward if they just miss on one or two requirements. I do this because the numbers may change in the last 3 months of the year, and I don't want to drop a stock prematurely. Stage 2 will allow no easing. From past experience, Stage 2 will eliminate 20%-30% of the stocks. I love eliminating stocks, not only beause it reduces the work required in later stages, but also because I love to see the best of the best begin to emerge.

At the end of Stage 2, the stocks that remain will be the "Semi-Finalists." Those will then be put through many more tests than the initial 6 requirements. The best ones that rise to the front of the list will become the "Finalists." I'll choose the Top 40 from those some time in January.

I am still hoping to have the publication available in January. My final scoring of stocks and selection of the Top 40 cannot be completed until January, because I need year-end data. My wife and I have decided to take a southern trip just after the holidays, so I will lose a few days in the car. In 2010, I got the project published on January 19 (if I recall correctly). I am hoping to hit around that date again with this edition.

September-October Rally Continues Into November; Timing Outlook Positive at 9.0

1. Summary

The market has been generally rising since the beginning of September. Because the Timing Outlook has a number of technical trend-following components, the market action has pulled the Timing Outlook higher. Its reading currently is 9.0, up from 8.0 last time. That said, last week’s trading was mostly down, and the market had its first losing week in the last six weeks.

After four months of trading sideways, in a range of 1,040 to 1,130, the S&P 500 index finally passed through and stayed above 1,130 on September 20, and it has stayed above that level ever since. It closed Friday at 1199.

As frequent readers know, I require both a positive Timing Outlook plus the satisfaction of a separate set of criteria to invest money in my Capital Gains Portfolio. (Click the “CRITERIA FOR RE-ENTERING THE MARKET” link in the right-hand column to see the additional criteria.) In a nutshell, I look to invest in a “rising” market. The criteria define what that means.

After months of failing to meet the criteria, they were finally met on September 14, and they have generally stayed satisfied since then. I have invested 60% of my portfolio’s money back into the market, in 10% chunks. Generally I check at least once per week to see whether to make another 10% investment. While the slow pace of re-investing costs me some gains when the market rises as sharply as it has, I nevertheless continue to move deliberately. This approach provides a margin of safety and conservatism that has served me well over the long term.

I apologize that my only investments are in ETFs, which reduces the educational value somewhat. Because most of my time in the last three months of the year is devoted to preparing 2011’s edition of THE TOP 40 DIVIDEND STOCKS, I do not have up-to-date Easy-Rate™ sheets for individual capital-gains stocks. Therefore, for re-entering the market, I have been purchasing shares of SPY, one of the ETFs that track the S&P 500. Well, this is meant to be a demonstration portfolio, so I guess it is demonstrating what happens when you don’t have the time to keep up with everything that you would like to do.

The third-quarter earnings season, now winding down, has been strong but not fabulous. The “beat rate” for stocks (that is, the percentage of those exceeding analysts’ consensus earnings estimates) has been just a little higher than the historical average of 61%. Economic news has been choppy. The pace of the economy’s growth is unimpressive. The unemployment rate remains stuck at 9.6%. The housing market is recovering very slowly if at all. Every good economic report seems to be followed by an equal-but-opposite bad report within a day or two. The Federal Reserve has announced that it will buy more Treasury bonds in an effort to stimulate more economic growth. Last week was the market’s first losing week in five weeks. I have a tight 5% sell-stop under my SPY holdings.

My newly re-named Dividend Growth Portfolio remains 100% invested, as it always is. Because the focus there is on continually increasing the dividend stream, I don’t use sell-stops or go to cash when the market plunges. The only cash in that portfolio is accumulated dividends waiting to be reinvested when the total hits $1000. As stated earlier, I am deep into preparation of THE TOP 40 DIVIDEND STOCKS FOR 2011. I will keep you up to date on its progress. I hope to release it in January.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, November 12, 2010)

Last Outlook (10/11/10): 8.0 (positive)
S&P 500 last time (10/11/10): 1167
S&P 500 now: 1199 Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1199 Change in 2010: +8%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1199 Change since 3/9/09: +77% (in about 20 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report in October showed an increase in this index, the third in a row. That satisfies my requirements for this indicator jumping from neutral to positive. +10

• Fed Funds Rate: No change. With the Federal Funds rate near zero, this indicator remains positive. As stated above, the Fed continues to try to cook up new ways to stimulate the economy besides keeping interests rates low. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 15.1, up slightly from 14.7 last time. This is still well within positive territory at any value below 17.4. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.01, up slightly from 1.00 last time. This suggests that the market is fairly valued right now. Neutral. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. Although the market’s fall on Friday pulled the index down close to its 20-day SMA, it finished above it. Thus the configuration remains the same as last time, Index > 20-day > 50-day, which is usually a positive picture. +10

• S&P 500 Medium Term Technical Trend: The medium-term configuration has risen to positive, as the 50-day SMA crossed upward through the 200-day SMA on October 21-22, the so-called “golden cross.” Many consider this to be one of the strongest technical indicators. Positive. +10

• DJIA Short Term Technical Trend: This chart looks similar to the S&P 500 chart, except that Friday’s close was slightly under the 20-day SMA. That makes this chart ambiguous. Neutral. +5

• DJIA Medium Term Technical Trend: On the Dow, the “golden cross” took place at the beginning of October. Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ’s chart has the same configuration as the S&P for both time-frames, although Friday’s close was just a fraction above the 20-day SMA. Positive. +10

• NASDAQ Medium Term Technical Trend: Positive, after a “golden cross” on October 20-21. +10

TOTAL POINTS: 90
NEW READING: 90 / 10 = 9.0 = POSITIVE