Gauging the relative risk of one stock compared to another is important when deciding which stock to buy or how much to weight a stock within your portfolio. Recently, during a scheduled site maintenance event on my broker's site, S&P reports were temporarily unavailable. This made me question if I really wanted to rely on propriety financial information that was not readily available from multiple sources. Ultimately, I decided it was not a good thing. To remedy this situation, the RQ portion of my risk calculation was modified as such:
For the Risk portion, I opted to focus on consecutive dividend increases. The logic here is the longer a company raises its divided, the more committed it is to dividend increases and is less likely to stop unless dire financial circumstances dictate it. Instead of relying on S&P's Qualitative Risk Assessment (Low, Medium and High) to assign a risk rating, I will now use the following to assign the A, B or C risk rating:
- A Risk Rating is assigned to companies that have increased their dividends for greater than 25 years.
- B Risk Rating is assigned to companies that have increased their dividends for 15-25 years.
- C Risk Rating is assigned to companies that have increased their dividends for less than 15 years.
- 1 Quality Rating is assigned to companies if their Free Cash Flow Payout % is less than 60% and if their Debt to Total Capital is less than 45%.
- 2 Quality Rating is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is less than 100%.
- 3 Quality Rating is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is greater than 100%.
- Overall the new method produces lower risk scores.
- The overall risk rating on my income portfolio went from 1.78 (medium) to 1.68 (medium).
- High risk stocks went from 7 stocks to 4 stocks.
- Medium risk stocks went from 77 stocks to 54 stocks.
- Low risk stocks went from 27 stocks to 53 stocks.
- Johnson & Johnson (JNJ) - Analysis
- Procter & Gamble Co. (PG) - Analysis
- Wal Mart Stores Inc. (WMT) - Analysis
- Pepsico Inc. (PEP) went from a 1.00 (low) to 1.25 (low) - Analysis
- United Technologies Corp. (UTX) went from a 1.25 (low) to 1.50 (low) - Analysis
- Exxon Mobil Corp. (XOM) went from 1.50 (low) to 1.75 (medium)
- Colgate Palmolive Co. (CL) went from 1.50 (low) to 1.75 (medium)
- International Business Machines (IBM) went from 1.75 (medium) to 2.00 (medium)
Full Disclosure: Long JNJ, PEP, PG, UTX, WMT. See a list of all my income holdings here.
(Photo: sean carpenter)
Tags: [CL] [IBM] [JNJ] [PEP] [PG] [UTX] [WMT] [XOM]