I recently wrote about my SWAN decision tree for selecting DGI stocks. The article explains the decision tree that I developed that assigns a numerical score for each DGI stock that I analyze. My decision tree is constructed so that the numerical rating for a specific DGI stock mirrors my confidence level in that stock. The higher the scores of the stocks within the Dividend House portfolio, the higher my confidence that our retirement portfolio will allow us to sleep well at night (SWAN) - even through a market crash.

Below is a diagram of the Dividend House SWAN decision tree. For a detailed walkthrough complete with DGI examples, please see the article link above. For a higher level discussion of the criteria I use to evaluate the attractiveness of DGI stocks, check out a recent podcast that I did with Brian Bain, also known as "investor in the family".

This article delivers on my promise to write a follow-up piece that shares with you how each stock in the Dividend House portfolio rates using my SWAN decision tree. As a bonus, I am including the scores of some of the stocks on my watch list as well.

Before we get started, below is a graphic depicting our current Dividend House DGI retirement portfolio.

Our portfolio has five categories - but only four of them are on purpose! We have core stocks (in the Dividend House foundation), supporting positions (making up the walls), and auxiliary positions (on the roof). In addition, we have speculative positions (the flowers in our garden). Unfortunately, we also have a doghouse for stocks that aren't performing as intended. If you are interested in more information on how we define each of our portfolio classifications, please see my article, How to Build a Dividend House: Which Stocks Go Where?

Dividend House SWAN Decision Tree Ratings

As shown in the SWAN decision tree graphic above, the Dividend House rating for a specific stock includes scoring a stock against its dividend yield, S&P credit rating, debt-to-total capital ratio, payout ratio, number of years of increasing dividends, historical 5-year dividend CAGR, forecast 3-year dividend CAGR, its historical Chowder number, and beta.

Below are tables that show the Dividend House SWAN decision tree scores and the number of years of increasing dividends for each of the stocks in the Dividend House portfolio and on our watch list.

Personally, I find it relatively difficult to look at all of these tables of numbers and instantly see which stocks are more attractive than other stocks. So, I created a graph that allows me to see relative attractiveness levels at a glance!

Now, we're talking! Here's how to read the above graph - in general, the higher the SWAN decision tree score and the greater the number of consecutive years a stock has increased its dividend, the better fit the stock is for our DGI retirement portfolio. In other words, the closer a stock is to the upper right hand quadrant of this chart, the more attractive I find it! For example, Johnson & Johnson (JNJ) is a great match for our portfolio. Meanwhile, BHP Billiton (BBL) doesn't look so hot.

Please note that the stocks whose tickers are in red font currently have a dividend yield of less than 2.7%. I point this out because anything less than a 2.7% yield is less than our portfolio's guideline minimum for adding new positions. This doesn't necessarily stop me from investing. But, I want to be acutely aware when I am purchasing stocks with low dividend yields.

As a reminder, I do not own all of the stocks shown in this graph. Some of them - like Cisco (CSCO) - are on my watch list.

Candidates for the Dividend House Foundation

The stocks that fall into the light green box are clearly candidates for the Dividend House foundation (core stocks). Why? Because they are all Dividend Champions (i.e., they have increased their dividends for at least 25 years) and they all have a Dividend House score above 8.

I own 18 of the 21 DGI stocks that fall into the light green Dividend Champions box on the chart above. Even so, that doesn't mean that all 18 DGI stocks are automatically considered core (foundational) stocks in my retirement portfolio. Qualitative factors come into play that knock some of these stocks into other categories.

For example, of the 18 stocks that I own in the light green box, I place 15 of them in my Dividend House foundation. Of the three "light green box" stocks that I own that are not in my foundation, I have categorized Chevron (CVX) as a supporting stock (in the walls) due to the cyclical nature of the energy business. Furthermore, I have placed HCP (HCP) and Wal-Mart (WMT) in my doghouse as I am actively looking to exit positions in both stocks (when the price is right!). Of course, you may make different choices for your own portfolio.

Candidates for the Dividend House Walls

Let's take a look at the next group of stocks - the Dividend Contenders. In the graph above, the stocks in the light blue box are candidates for the Dividend House supporting stocks (for my walls). Why? Because they have increased their dividends every year for 11-24 years and score above 8 on the Dividend House SWAN decision tree.

Looking at the stocks in the light blue box, you will notice that most of the utilities are here. Even so, I place them in my Dividend House foundation, rather than in the walls. Why? Since almost everyone pays their utility bill even during deep recessions, I view utilities as defensive stocks that can weather many a storm. To help ensure a steady and growing dividend stream, the trick is to identify those utilities that have a good relationship with their regulators!

Looking at the light green and blue boxes together, here is where we can see the usefulness of the Dividend House SWAN rating system. If one of the stocks on my watch list were to score below an 8 on the SWAN rating system, I would eliminate it as a possible addition to my portfolio in my Dividend House foundation or walls. Why? In order to score such a low number, the stock is exhibiting multiple categories of weakness. Generally speaking, stocks that score below an 8 don't exhibit strong dividend growth over a period of years. In addition, these stocks exhibit other areas of weakness, like a low credit rating, a high debt ratio and/or a high payout ratio. Stocks with weaknesses in several areas just don't make me feel secure enough to place them in my Dividend House foundation or walls!

There is no reason for me to add a core or supporting stock to my portfolio that falls below a SWAN score of 8 when I can own lots of others that outscore that stock (where you can see them perched above the horizontal blue line). In fact, I'd prefer my core and supporting stocks to rate at least double digits. Check out Microsoft (MSFT) or NextEra Energy (NEE) - each has a SWAN score of 17!

When I make exceptions to my guidelines, they are usually on the roof (i.e., auxiliary holdings) or in the garden (i.e., speculative positions).

Candidates for the Dividend House Roof

The graph shown above has a yellow box with Dividend Challengers that have increased their dividends every year for 5-10 years. The stocks that score above 8 are natural candidates for my auxiliary positions on the Dividend House roof. For example, even though I am very reticent to invest in the technology space, one of the stocks on my watch list - Cisco - looks very attractive for an entry auxiliary position in our portfolio.

Two of the stocks that fall below a SWAN score of 8 - Merck (MRK) and Bristol-Myers Squibb (BMY) - are also found on my roof. In both of these cases, I am betting that the secular trends in healthcare will allow these stocks to extend their dividend growth histories into the future.

Candidates for the Dividend House Garden

Finally, in the orange area are additional stocks to be considered. This orange area contains stocks that are not on the CCC list because they haven't achieved growing dividends for at least 5 years.

I usually consider these stocks to be speculative in nature (although, as with all of the other areas, there are exceptions to that rule!). For example, I have placed Kraft Heinz (KHC) on my roof, even though it has zero years of dividend growth history and scores only a 6 on the SWAN decision tree.

Since I purposefully designed the SWAN decision tree to penalize stocks that do not have a solid history of increasing dividends, KHC's lack of dividend growth history is penalizing it heavily (as it should!). But, if one assumes that KHC's stock will eventually act like other stalwart food & beverage consumer staples companies, like General Mills (GIS), Coca-Cola (KO), or Pepsi (PEP), then KHC will soon exhibit the characteristics that place it at least on the roof of my dividend portfolio. So, it sits there as an entry point into my portfolio. KHC's future performance will dictate where it goes from there.

Graphing the results of my SWAN decision tree scores, I can see my portfolio at a glance. I can see the stocks in which I should consider having the highest level of confidence, as well as those which I should consider to be more speculative. I use this quantitative approach as a first step in determining where a stock actually sits in the Dividend House portfolio. Qualitative factors, like a company's strategy, industry characteristics, its perceived economic moat, strength of management, dividend safety, etc. also factor into a stock's current position in our portfolio.

Why does a stock's position matter? Because I don't equally weight all of the stocks in our 66-stock portfolio! For example, each core stock (in our foundation) is targeted to produce between 2.5% and 4% of our portfolio's income. Each supporting stock (making up the walls) is targeted to generate between 1.5% and 2.5% of our portfolio's income. Each auxiliary stock (on the roof) is targeted to produce between 0.5% and 1.5% of our portfolio's income.

Even without buying or selling another stock, the picture of our portfolio will change! For example, due to strong performance, an individual stock may "earn" its way into a more central role in our portfolio, for example, moving from a position on the roof to the walls - or even into the foundation.

Likewise, through weak performance, a stock can "fall from grace". The clearest examples of this are stocks that fall completely out of the Dividend House, landing in our doghouse. At the moment, our crowded doghouse has eight dogs living in it! They are Tupperware (TUP), Nokia (NOK), Wal-Mart, BHP Billiton, ConocoPhillips (COP), Caterpillar (CAT), HCP, and Care Capital Properties (CCP). As prices cooperate, I am working on getting out of these stocks. In some cases - like BBL and COP - this process will almost certainly take years (and that's only if certain commodity prices cooperate).

I hope this article helps you think about how you might build or remodel your own DGI retirement portfolio!

I would love to hear from you. Do you weight your positions equally or unequally? Do you weight by market value or dividend income produced? Which of the stocks in your portfolio would you place in a different position in your Dividend House?

This article was written by

Disclosure: I am/we are long ABBV, ABT, AMGN, AVA, BBL, BMY, CAH, CAT, CBRL, CCP, CLX, CMCSA, COP, CVX, D, DEO, DLR, DUK, ED, EMR, EPD, FLO, GE, GILD, GIS, HCP, IBM, JNJ, KHC, KMB, KMI, KO, LMT, LNT, MCD, MMM, MMP, MO, MRK, MSFT, NEE, NOK, O, OHI, OMI, PDCO, PEP, PFE, PG, PM, SCG, SEP, SO, SYY, T, TUP, UL, UPS, VTR, VZ, WEC, WMT, WPC, XEL, XOM, ZBH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.