Parsimony Ratings Methodology
We use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a robust rating system that ranks over 500 U.S. dividend stocks on a monthly basis.
Our Parsimony Ratings are derived by ranking each stock against the rest of the universe based on 30 key fundamental and technical data points across four rating categories (see list below). Our Parsimony Ratings range from 0 (lowest) to 99 (highest). These ratings can also be thought of as percentile rankings (i.e., if a stock has a rating of 95, it is in the 95th percentile of all stocks in our universe for that particular rating). Depending on what kind investor you are, some rating categories will be more valuable to you than others…but all 4 ratings are important to analyze before making an investment decision.
DIVIDEND: Measures the stock’s historical dividend stability and growth and the company’s ability to continue to make (or raise) its current dividend.
- Dividend Yield – stocks in our universe have a minimum dividend yield of 1.0%
- Consecutive Years with Dividend Increases – consecutive years of increasing payouts to shareholders
- Dividend Growth (1-year) - companies with a strong history of dividend growth tend to continue that trend in the future
- Dividend CAGR (5-year) - companies with a strong history of dividend growth tend to continue that trend in the future
- Dividend CAGR (10-year) - ideally a stock’s long-term dividend growth rate will be higher than the rate of inflation
- Payout Ratio (LTM) – % of earnings paid out in dividends; generally a lower payout ratio is preferred to a higher ratio
SAFETY: Measures the stock’s overall financial health. All else being equal, companies with stable revenues, earnings and cash flow and strong balance sheets tend to be safer investments with more stable dividend growth.
- Revenue Growth & Stability - factors in long term annual growth rates (5yr CAGR) as well as year-over-year (past 5 years) and quarter-over-quarter (past 8 quarters) revenue stability
- Earnings Growth & Stability - factors in long term annual growth rates (5yr CAGR) as well as year-over-year (past 5 years) and quarter-over-quarter (past 8 quarters) EPS stability
- EBITDA (Cash Flow) Growth & Stability - factors in long term annual growth rates (5yr CAGR) as well as year-over-year (past 5 years) and quarter-over-quarter (past 8 quarters) EBITDA stability
- Cash Flow From Operations / Net Income - measures quality of earnings and ability to turn sales into cash
- Return-on-Capital (LTM) – measures the profitability of a company; the higher, the better
- Debt/Capital – high-quality dividend stocks tend to have low debt levels
- Current Ratio – measures short-term liquidity and a company’s ability to pay short-term obligations
- Interest Coverage– measures company’s ability to service outstanding debt; the higher, the better
- Historical Volatility (5-year) – measures the long-term annual standard deviation for a stock
- Beta (5-year) – low beta stocks tend to be less volatile than the general market
VALUE: Measures the stock’s relative valuation compared to historical trading levels. We use multiple valuation metrics to derive our Value rating as multi-factor models have proven to be better indicators of long-term value than single-factor models.
- Price / Sales (TTM vs. 5-year Avg.) – measures the value placed on each dollar of a company’s sales
- Price / Earnings (TTM vs. 5-year Avg.) – measures the value placed on each dollar of a company’s earnings
- Price / Book (TTM vs. 5-year Avg.) – compares the stock’s market value to its book value
- EV / EBITDA (TTM vs. 5-year Avg.) – compares a company’s total enterprise value (including debt) to its annual cash flow
- Shareholder Yield – unites a stock’s dividend yield with its buyback yield to show what percentage of cash the company is paying out to shareholders
- Current Yield (vs. 5-year Avg.) – compares a stock’s current yield to its 5-year average yield
- Current Pullback (vs. 5-year Hist Volatility) – compares the current volatility of a stock to its 5-year average
MOMENTUM: Measures the strength of the stock’s trend. Stocks that outperform tend to continue to outperform.
- 6-Month Relative Strength – compares a stock’s 6-month return to the avg. 6-month return of our universe
- 12-Month Relative Strength – compares a stock’s 12-month return to the avg. 12-month return of our universe
- % of 52-week High – compares a stock’s current price to its 52-week high
- Trend (50-day > 200-day) – A stock is in an uptrend if its 50-day moving average is above its 200-day moving average
- Industry Relative Strength (12-month) – Stocks in strong industries tend to outperform stocks in weak industries
- Relative Strength vs. Industry – compares a stock’s 12-month return to the avg. 12-month return of its industry peers