We only have two sectors left to sort through before we’ve completed building our diversified “Quantigence DGI Portfolio” of 30 DGI stocks that will pay us growing income streams in the years to come. The 2 remaining sectors we have to analyze are “financials” and “REITs”. Now astute investors will challenge this statement because according to the GICS sector classification, REITs are actually classified as financials stocks presently. That’s correct, but in September of this year, REITs, will move to become their own sector. We will therefore exclude all REITs in our analysis of the financials sector.
Firstly, let’s pull up all financials stocks that have paid and increased dividends for 20 or more years and that have a market cap greater than $10 billion:
Now let’s take a look at the Q-Scores for each of these stocks.
The first thing we notice here is that the top-4 stocks ranked by Q-Scores are 2 insurance firms and 2 asset management firms. Remember how we said we always wanted to hold stocks that are in differing lines of business in order to diversify our income streams? We may have a case here where we have to make an exception if we want to hold 3 financials stocks. The Q-Scores for the top-3 stocks are fairly strong. We add BEN right away given it has such a high Q-Score. We then add CB because it also enjoys a high Q-Score. Now we’re left with a dilemma.
If we add AFL, we’re adding 2 insurance companies and we don’t like to do that. If some massive natural disaster strikes, insurance companies will take a hit as a group. However the next best choice by Q-Score is TROW which is an asset manager just like BEN. The problem with adding TROW is that while their Q-Score is in our desired range of 15+ at the moment, they still lag AFL by 155 basis points which is quite a meaningful difference. The majority of that difference though is an “international sales” bonus given to AFL. While you may think of Aflac as “the company with that duck commercial”, they’re actually the largest insurance company overall in Japan. AFL’s Japan business contributed 74% of their total earnings in 2015.
As you may have noticed, we’re huge fans of having international exposure in our portfolios as most U.S. investors will exhibit domestic bias and overload their portfolios with stocks that are entirely dependent on the U.S. economy alone. We like to see businesses that are geographically diversified because then if they elect some loony in the United States who drives the economy into the ground, our multinational dividend growth stocks will be able to look elsewhere to find that growth needed to give us a raise every single year. We’re going to go ahead and add AFL to our portfolio based on their high Q-Score relative to TROW and the fact that they have some very unique international exposure.
There is one last thing we should mention. Both BEN and TROW pay “special dividends” which means their yields can soar in any given year. We obviously will adjust for this in the Q-Score to not include special dividends when calculating present yields.