How do I define High Quality

When purchasing stocks it is very important to ensure that the majority of one's holdings are high quality. Owning high quality is very important if an investor is in for the long term. Short term traders and trenders can get away with lower quality holdings with bigger upside potentials, but in the long term the lower quality companies do not fare as well due to the draw downs they experience. Additionally, the lower quality companies may not be financial strong enough to handle a recession as well. Higher quality companies have the financial strength and earnings strength to continue business during recessions, making their draw downs much less than lower quality companies.

My definition of high quality is rather straight forward. I use both Value Line and S&P to get my financial ratings.

High quality:
BBB+ or higher S&P credit rating
2 or 1 safety rating by Value Line
A or higher financial strength by Value Line

Highest quality:
A+ or higher S&P credit rating
1 safety rating by Value Line
A++ financial strength by Value Line

I find that the S&P credit ratings to be lower than the Value Line ratings on several of my holdings, or in other words S&P is more critical. In the end, I find both rating groups to provide rather consistent ratings on companies relative to another, and most of the ratings are aligned with my expectations after researching a company. Companies I buy that have a S&P credit at or under BBB or has a S&P credit rating under B++, I would consider these as more speculative in nature.

These speculative positions I would not "double down" during a draw down. I would on the other hand be willing to add to my high quality positions on a pull back without hesitation if I had the funds.

Below is my portfolio as of today. The 3 columns on the right show the quality ratings. Value Line gave PM and MO lower ratings than I thought, most likely due to the large debt and payout of tobacco companies. I would admit that I would not consider PM and MO as "high quality" as Colgate, Johnson and Johnson, Exxon, or Coke and my expectations of their risk were understood before I purchased them.

The companies that are the highest quality according to Value Line and S&P have all 3 columns highlighted in green. These include: JNJ, V, XOM, KO, PG, ABT, CL, WMT, MMM, CVX, TJX. Many of these are proven dividend aristocrats, who had sustainable payouts and earnings even during past recessions.

My lowest quality holdings are HCP and KMI.

Ticker	Sector	Value	Weight	Yearly Dividend	Yield	S&P Fin	VL Fin	VL Safety
MO	Staples	$10,543.77	7.76%	$423.86	4.02%	BBB+	B+	2
JNJ	Health	$8,771.36	6.45%	$263.14	3.00%	AAA	A++	1
PM	Staples	$7,748.02	5.70%	$371.90	4.80%	A	B++	2
O	REIT	$7,263.92	5.35%	$349.39	4.81%	BBB+	A	2
V	Financial	$6,241.29	4.59%	$38.07	0.61%	A+	A++	1
PEP	Staples	$4,838.38	3.56%	$138.86	2.87%	A	A++	1
CHD	Staples	$4,676.61	3.44%	$75.76	1.62%	BBB+	A+	1
XOM	Energy	$4,228.24	3.11%	$158.14	3.74%	AAA	A++	1
GIS	Staples	$4,062.88	2.99%	$127.98	3.15%	BBB+	A+	1
KO	Staples	$3,973.00	2.92%	$126.74	3.19%	AA	A++	1
T	Telecom	$3,951.12	2.91%	$229.96	5.82%	BBB+	A++	1
KHC	Staples	$3,663.64	2.70%	$113.94	3.11%	BBB-	A	2
MKC	Staples	$3,319.97	2.44%	$65.07	1.96%	A-	A+	1
BDX	Health	$2,738.11	2.01%	$44.08	1.61%	BBB+	A++	1
KMB	Staples	$2,563.27	1.89%	$76.90	3.00%	A	A++	1
PG	Staples	$2,515.57	1.85%	$90.06	3.58%	AA-	A++	1
SO	Utilities	$2,062.31	1.52%	$101.88	4.94%	A-	A	2
ABT	Health	$2,058.25	1.51%	$44.87	2.18%	A+	A++	1
CL	Staples	$2,045.02	1.50%	$48.06	2.35%	AA-	A++	1
WMT	Staples	$1,802.89	1.33%	$62.56	3.47%	AA	A++	1
MMM	Industrial	$1,389.21	1.02%	$36.54	2.63%	AA-	A++	1
APD	Materials	$1,215.76	0.89%	$28.69	2.36%	A	A+	1
D	Utilities	$527.38	0.39%	$20.04	3.80%	A-	B++	2
NEE	Utilities	$405.78	0.30%	$12.46	3.07%	A-	A	2
MA	Financial	$4,556.10	3.35%	$30.07	0.66%	A	A++	2
HCP	REIT	$2,083.29	1.53%	$143.75	6.90%	BBB+	B++	3
CVX	Energy	$2,017.71	1.48%	$97.46	4.83%	AA	A++	1
PX	Materials	$1,965.48	1.45%	$49.53	2.52%	A	A	1
ABBV	Health	$1,904.29	1.40%	$64.94	3.41%	A	A	2
VZ	Telecom	$1,829.22	1.35%	$90.91	4.97%	BBB+	A++	1
UTX	Industrial	$1,742.83	1.28%	$46.19	2.65%	A-	A++	1
MCD	Discret	$1,709.40	1.26%	$52.82	3.09%	BBB+	A++	1
KMI	Energy	$1,523.88	1.12%	$127.85	8.39%	BBB-	B++	3
VFC	Discret	$755.90	0.56%	$15.57	2.06%	A	A	2
XEL	Utilities	$439.70	0.32%	$16.09	3.66%	A-	A	1
ROST	Discret	$2,860.12	2.10%	$30.03	1.05%	A-	A	2
DIS	Discret	$2,574.35	1.89%	$29.60	1.15%	A	A++	1
AAPL	Tech	$2,513.46	1.85%	$46.50	1.85%	AA+	A++	2
UNP	Industrial	$2,345.33	1.73%	$61.68	2.63%	A	A++	1
SBUX	Discret	$2,289.50	1.68%	$24.50	1.07%	A-	A++	1
TJX	Discret	$1,969.83	1.45%	$25.80	1.31%	A+	A++	1
GILD	Health	$1,128.97	0.83%	$18.97	1.68%	A-	A	3
AMGN	Health	$563.58	0.41%	$11.78	2.09%	A	A++	1
…..	…..2	Equity Total	…..4	Yearly Dividend	Mean Yield	…..8	…..82	…..83
		$129,378.64		$4,032.99	3.12%
Cash	Cash	$6,513.42	4.79%
.	..	Equity + Cash	…	…..22	…..2	…..	…..222	…..223
		$135,892.06

Dividend growth investors should focus on quality. Quality insures that the dividend is healthy and can be increased year after year. Many of the highest quality companies have large moats and sustainable payout ratios. The earnings growth of these companies drive dividend growth. These companies have products and services that are needed even during recessionary times, such as JNJ, PG, KO, CL, WMT. Buying high quality companies will help one sleep well at night, even when the share price has crashed by 30%. It is during tough times that one should add to high quality companies in excitement, knowing that they will one day come back up stronger than ever. By understanding that one owns high quality will help one control the irrational emotions to sell.

This is not to say that one should not buy lower quality companies. I have some holdings that are speculative in nature. Investors need to have the proper expectation on such holdings. A good balance of speculative and core positions should be considered in a person's portfolio depending on his or her stage in life and risk tolerance.

-YD