08 Oct 2015 15:48

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The first time I saw the tagline DIVCON I thought it was a convention for dividend investors similar to what COMICON is to comic fans but it was not like that at all. DIVCON is a new dividend rating tool created by the San Diego based investment firm Reality Shares Advisors.


The title DIVCON is actually a play on of the U.S. Military’s DEFCON rating system and just like that system they have a scoring ratio of 1 to 5 with 5 being the best and 1 being the worst.


The DIVCON tool consists of 1200 mid to large size U.S. listed stocks and does something rather unique, it predicts who is likely to increase their dividend over the next 12 months. This is different than the analysis I normally perform as I perform to see if a company is capable of dividend growth, a subtle difference but prediction requires a different analysis than capability to grow.

The tool takes into account several factors including free cash flow, dividend growth history, earnings growth and share buybacks. I tested the tool out with 40 different stocks of which 38 I knew had the capability to raise dividends and 2 that did not. 2 stocks scored the highest rating of 5 (very healthy), 31 stocks scored a 4 (healthy), 3 stocks scored a 3 (neutral), 1 stock scored a 2 (risky), and 3 came back as not found because they were too small (micro caps).

Those were pretty good results, the three that came back with a score of 3 (neutral) were Chevron (CVX), General Mills (GIS) and Kimberly Clark (KMB) of which CVX was one of my will not grow candidates. The lone result with a score of 2 was Ensco (ESV) which was my other will not grow candidate. I don’t necessarily agree with the GIS & KMB ratings but it did sniff out my clunkers.

According to a white paper written by Reality Shares they have been validating the model with stocks from 2001 to 2014 and boast the following effectiveness:


Apparently the model is more accurate at predicting positive growth for very healthy companies than it is at predicting zero or even negative growth. Of course one could argue that the model was not back tested far enough and needs to be back tested against a larger amount of time but it is interesting none the less.

My personal take is that I find the tool interesting and would use the tool as a reference point during my research phase. But, I would not make investing decisions based on the results and still rely on doing the due diligence of a detailed financial analysis. Regardless of a tool, it is no substitute for analyzing all of the factors that define a company’s liquidity, profitability, and credit risk.

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