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Top 10 Dividend Aristocrats Using The PEG Ratio


Published on December 29th, 2014

On May 22nd, 2014, I wrote an article on the 10 Dividend Aristocrats with the lowest PEG ratio.  Each of the 10 stocks from that article are shown in the table below, along with their modified PEG ratio (more on this later on in the article) at the time, and their total return since the market close on May 22nd.

Dividend Aristocrats by PEG Performance 2014

As you can see in the table above, low PEG Dividend Aristocrats have slightly outperformed the market over the last 7 months.  The outperformance was driven by large gains in Target (TGT) and Family Dollar (FDO) and partially offset by 6%+ losses in oil stocks ExxonMobil (XOM) and Chevron (CVX).  Apparently, the PEG ratio does not have the preternatural ability to predict oil price shocks.

Modifying the PEG Ratio

As mentioned above the PEG ratio can be improved with a slight modification.  When Peter Lynch originally came up with the PEG ratio, he used it primarily for small cap stocks that did not pay dividends.  In its original form the PEG ratio is:

PEG Ratio

The original PEG ratio does not factor in returns from dividends; it only accounts for returns from growth.  A sizeable portion of Dividend Aristocrat returns comes from dividends.  Discluding dividends from the PEG ratio leaves out an important piece of information.  The modified PEG ratio adds dividend yield into growth to show how cheap a stock is based on total return.  The formula below shows the modified PEG ratio:

Modified PEG Ratio

Current Top 10 Lowest PEG Ratio Dividend Aristocrats

The table below shows the current Top 10 cheapest Dividend Aristocrats using the modified PEG ratio.

Dividend Aristocrats by PEG

Only 2 stocks have been removed since May:  Target and Family Dollar.  Both stocks fell off the rankings due to significant price increases.  Archer-Daniels-Midland (ADM) and Franklin Resources (BEN) replaced Target and Family Dollar on the Top 10 cheapest Dividend Aristocrats using the PEG list.

The Top 10 list is slightly more expensive than it was in May.  The average modified PEG ratio for the stocks on the list in May was 1.41, versus 1.45 in December.  Many of the stocks on the list are suffering from negative macroeconomic current events.

Final Thoughts

The PEG ratio and the modified PEG ratio are good tools to have in your valuation arsenal.  They are not perfect, but do a good job of framing investments by what you have to pay for a certain total return.  The PEG ratio can quickly determine what stocks an investor should spend more time investigating, as it points to stocks that could be undervalued.

Combining the modified PEG ratio with the Dividend Aristocrats Index looks for high quality dividend paying stocks that are cheap based on their total return potential.  Using the modified PEG ratio on the Dividend Aristocrats index captures the spirit of The 8 Rules of Dividend Investing.  With that said, there are several differences:

  1. The 8 Rules of Dividend Investing are applied to stocks with 25 or more years of dividend payments without a reduction which is a slightly more inclusive criteria and opens analysis up to 140+ stocks instead of 54
  2. Stock price volatility is considered in The 8 Rules of Dividend Investing
  3. Payout ratio is considered in The 8 Rules of Dividend Investing
  4. When to sell is discusses in The 8 Rules of Dividend Investing
  5. Portfolio allocation is discussed in The 8 Rules of Dividend Investing

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