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