Whiddon Wealth Management, LLC
Securities offered through LPL Financial. Member FINRA/SIPC
"Compound interest is the
eighth wonder of the world.
He who understands it, earns it
... he who doesn't ... pays it."
Albert Einstein
Albert Einstein when asked what he considered to be the most
powerful force in the universe answered: “Compound interest!
What you have become is the price you paid to get what you used
to want.”
Mignon McLaughlin, American Journalist
Compound interest is interest that is calculated not only on the initial principal, but also the
accumulated interest of prior periods. Compound interest differs from simple interest in that simple
interest is calculated solely as a percentage of the principal sum. The equation for compound
interest is: P = C(1 + r/n)nt.
The components for the equation of compound interest is: P = Future Value C = initial deposit r=
interest rate (expressed as a fraction: eg. 0.06 for 6%) n= # of times per year interest is compounded
t = number of years invested. Hopefully, most of us are aware of compound interest calculations.
How exactly do you calculate the compound interest with a given percentage of yearly returns?
Building off of the equation for the compound interest above, here is another example using the
formula that will help you accomplish the task, but using actual numbers. Suppose you are investing
$200,000 for 6 years at a compounding interest rate of 10% per year. This would be the calculation:
Amount investing (1+Interest %)*years. $200,000 (1+10%)*6 = The total amount you are going to
receive at the end of the 6 year should be $354,312.20. This example does not reflect any account
fees, transaction charges, taxes and/or inflation associated with any particular investment. Such
expenses, when levied, would reduce overall returns. The example is for illustrative purposes only
and is not intended to imply or represent a guarantee of any specific return of any particular
investment. Investment results fluctuate and can decrease as well as increase. Distributions, when
taken, are subject to federal and state taxes as ordinary income.
Interest Rates Really Are
Interesting
"Yeah, interest. It's an amazing thing.
You make money without doing
anything..."
"Y'know, I have friends who try to
base their whole life on that
principle."
"Really? Who?"
"Nobody you know...“
Jerry and George - Seinfeld TV Show
Compound Dividends!
“Compound Dividends are like compound interest on steroids,
figuratively speaking”
“Good dividend stocks’ yield, tends to stay within a given range, so if
dividends are increasing each year, the only way to keep a consistent yield
is for the price of the stock to go up.”
Source: Dividendvalue.com
1.Dividends may appeal to investors who desire stable cash flow but do not
want to incur the transaction costs from periodically selling shares of
stocks.
2.Behavioral finance argues that investors with limited self-control can meet
current consumption needs with high-dividend paying stocks while
adhering to the policy of never dipping into principal.
3. The board of directors, acting on behalf of the stockholders, can use
dividends in order to reduce cash available to spendthrift managers.
4. Dividends have long been a signal or indicator of company health to
investors. A constant dividend offers a sense of confidence to investors
the company is doing well, and views future potential to be equally as
sound.
5.The dividend approach gives a greater opportunity to beat inflation, over
time, than a bond-only portfolio.
Ross,Westerfield,Jaffe (2008) Corporate Finance
General risks inherent to investments in stocks include the fluctuation of market
prices and dividend*, loss of principal, market price at sell may be more or less
than initial cost and potential illiquidity of the investment in a falling market.
Small-cap stocks may be subject to a higher degree of risk than more established
companies’ securities. The illiquidity of the small-cap market may adversely
affect the value of these investments. Furthermore, the prices of small company
stocks are generally more volatile than those of large company stocks.
*Fluctuations in the market prices of stocks can often cause expected dividend
payments to fluctuate and change as well. It must also be noted that past
performance and/or past payments is not an indication of future results.
Goal:
 To concentrate on higher current dividend yields
that have also a history of annual dividend
increases in order to increase portfolio
performance while reducing risk
Reason:
 Tangible confirmation of management’s
confidence in future earnings growth
 Generation of higher levels of income over a long
period of time if reinvesting dividends
Objective:
To apply quantitative criteria to the wide universe
of dividend stocks in order to narrow it down to
few companies. This will allow us to concentrate
on a more promising group of dividend stocks,
our high probability dividend stocks!
Stock
Universe
Popular
List
Current
List
Master List
(250 stocks)
Scoring
Process
Top 25 Dividend
Stocks
Screen
Based List
Screening Process
STOCK UNIVERSE
Screen Based List
DRPs
High
Yield
Dividend
Growth
Dividend
Yield
High Div &
Growth
Master List
Scoring Process
TOP
25 DIVIDEND STOCKS
Dividend
Yield &
Profitabilit
y
 DRPs High Yield Screen: DRPs companies with high relative
yields, reasonable dividend payout ratios and high growth
 Dividend Growth: Looking for stable companies that are in the
maturity stage of their life cycle, above-average dividend growth
rates.
 Dividend Yield: Screen that looks for undervalued stocks using
the dividend-yield approach (companies with secure dividends –
example: specifying a maximum level of dividend payout ratio of less
than 50%)
 High Div&Growth: Screen that focuses on high-quality growth
stocks that have higher dividends and lower price volatility
 Dividend Yield & Profitability: Screen that looks for companies
with increasing profitability and reasonable dividend yield
 Current List: List that comes from our experienced advisors.
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Provides DRP plan
Yield >= 3
Dividend 12m >= Dividend Y1
Dividend Y1> Dividend Y2
Dividend Y2>Dividend Y3
Dividend Y3 > Dividend Y4
Dividend Y4>Dividend Y5
Dividend Y5>Dividend Y6
Dividend Y6>Dividend Y7
Dividend Gr. 5Y> Industry Div-Gr. 5Y
Yield > Yield-Avg. 5 Y
Payout ratio 12 <= 60%
EPS-Gr. 5 Yr >= Industry EPS-Gr.5Y
ADR/ADS Stock is false
Master List
Top 250 Dividend
Stocks
Scoring Process
Criteria for scoring:
- Consistent Growth
- Increasing
Profitability
- Good Financial Health
- High Dividend Yield
TOP
25 DIVIDEND STOCKS
 A model that describes the relationship between risk and expected
return and that is used in the pricing of risky securities.
 General idea behind CAPM: investors need to be compensated in two
ways: time value of money and risk.
 The time value of money is represented by the risk-free (rf) rate in
the formula and compensates the investors for placing money in
any investment over a period of time.
 The risk is represented by beta and calculates the amount of
compensation the investor needs for taking on additional risk (risk
premium)
 The CAPM says that the expected return of a security or a portfolio
equals the rate on a risk-free security plus a risk premium.
Investopedia, January 2011
36 variables in the Scoring Process, including:
-Dividend Growth
-Free Cash Flow
-Return on Equity
-Sales Growth…
 Yield Growth: Combination of dividend yield and
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dividend growth rate analysis. High value on this category
indicates stocks with above average yield and long-term
growth.
Dividend Analysis: In-depth analysis of dividend
stocks considering payout ratio, P/E ratio, earnings yield and
dividend yield.
Dividend Growth: Concentrates on sustainable growth
rate, the maximum growth rate that a firm can sustain without
having to increase financial leverage.
Strong Dividend Valuation: Focuses on strong
dividend stocks: a record of dividend increases over time.
Margin of Safety: Determines the margin of safety of
the stock based on dividend valuation approach.
 Investment term related to the payment of
dividend.
 Defined by the IRS as “the first date following
the declaration of a dividend on which the
buyer of a stock is not entitled to receive the
next dividend payment.“
 Theoretically, the closer to the ex-dividend
date, the higher the stock price. On the exdividend date the stock will drop the amount
by the dividend amount.
Glossary of Screen-Based Tests
• 12M = Recent 12 month period
• 1Q = Recent quarter.
• ADR = American Depositary Receipt = A negotiable certificate issued by a U.S. bank representing a
specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.
• ADS = American Depositary Share = A U.S. dollar-denominated equity share of a foreign-based company
available for purchase on an American stock exchange.
• Cash Flow = a revenue or expense stream that changes a cash account over a given period.
• Dividend = A distribution of a portion of a company's earnings, decided by the board of directors, to a class
of its shareholders.
• DRP = Dividend Reinvestment Plan = A plan offered by a corporation that allows investors to reinvest their
cash dividends by purchasing additional shares or fractional shares on the dividend payment date.
• EPS = Earnings Per Share: the portion of a company’s profit allocated to each outstanding share of
common stock.
•Gr. = Growth.
•LT Debt/Equity Ratio = Long-Term Debt/Equity Ratio: a measure of a company’s financial leverage
calculated by dividing its long-term debt by stockholders’ equity.
• Payout Ratio = The amount of earnings paid out in dividends to shareholders
• Sector = An industry or market sharing common characteristics. Investors use sectors to place stocks and
other investments into categories like technology, health care, energy, utilities and telecommunications.
Each sector has unique characteristics and a different risk profile.
Investopedia
AAII
Glossary of Screen-Based Tests
•ROE = Return on Equity: the amount of net income returned as a percentage of shareholders equity.
• Yield = This refers to the interest or dividends received from a security and is usually expressed
annually as a percentage based on the investment's cost, its current market value or its face value.
•Y1 = Recent Year
• Y = Yearly (example: Y EPS= Yearly EPS), or Years (example: 3Y= 3 Years)
Investopedia
AAII