There is a better way to get wealthy: pick dividend growth stocks

 

There is a better way to get wealthy: pick dividend growth stocks

https://myinvestingnotes.blogspot.com/2015/05/there-is-better-way-to-get-wealthy-pick.html

Based on the article dated May 15, 2015, the author Mike presents his complete, multi-step model for selecting and investing in dividend growth stocks. The goal is to build a portfolio that generates both capital appreciation and consistent, growing dividend income while being simple and efficient to manage.

Key Ideas:

• The author shifted to this strategy after the 2008 financial crisis, aiming for a less aggressive, more sustainable approach than his prior trading-focused method.

• The model is designed to address two common investor problems: lack of time and the need for a systematic buy/sell methodology.

The 5-Step Dividend Growth Stock Selection Model:

Step 1: Initial Stock Screening
Use a stock screener (e.g., FinViz or YCharts) to filter stocks based on specific metrics:

• Valuation: Dividend yield > 3%, P/E and Forward P/E < 20.

• Fundamentals: Positive 5-year EPS and Sales growth, Return on Equity > 10%, Payout Ratio < 70%.

Step 2: Analyze Sales and EPS Trends
Examine the 5-year trends of Sales and Earnings Per Share (EPS) together. Both should be growing and moving in the same general direction, indicating healthy business growth and stable margins.

Step 3: Examine Dividend Growth History
Create a simple 5-year graph of dividend payouts. Look for a stable, consistently upward trend rather than erratic or stagnant payment history.

Step 4: Assess Sustainability
Evaluate the company's ability to sustain and grow its dividend by examining:

• Management: Their tenure, compensation, and stated dividend philosophy.

• Recent Performance: Quarterly results vs. expectations and company guidance.

• Future Projects: The company's initiatives to grow and adapt its business for the future.

Step 5: Look to the Future
Synthesize the analysis to judge if the company can maintain its dividend through various economic conditions. Key questions involve its resilience during a recession and the impact of a sales slowdown.

Building the Portfolio: The Quadrant Strategy

To refine the final stock picks and construct the portfolio, the author uses a series of four quadrant analyses. Each quadrant plots two key metrics to visually compare stocks and identify the most attractive candidates.

1. Dividend Yield vs. Payout Ratio: Seeks high yield with a low, sustainable payout ratio (ideally below 70%).

2. Dividend Yield vs. 5-Year Dividend Growth: Seeks high yield combined with strong historical dividend growth.

3. 5-Year Dividend Growth vs. 5-Year Revenue Growth: Seeks companies where dividend growth is supported by solid revenue growth.

4. P/E Ratio vs. 5-Year Income Growth: Seeks reasonable valuation (lower P/E) coupled with strong historical profit growth.

Conclusion of the Strategy:
By cross-referencing all four quadrants, investors can identify stocks that consistently rank well (prime candidates for purchase), those that need more research due to mixed signals, and those that should be eliminated.