When you are about to invest, I believe the very first step is to determine your investing strategy. Your methodology should include considerations such as your risk tolerance, investing goal(s) and time horizon. Once this part is settled, you will get into determining which kinds of companies you want to hold in your portfolio. This will be the basis for you to start building a stock list. The stock list is your garden where you will pick and choose the best ingredients to make your portfolio recipe. As is the case when you cook, putting too much of a single ingredient will not make your meal better, the same rationale applies on your portfolio. Today, we will look at how you can build a stock list and pick the best ingredients from itso your dish will be delightful!
Why Should You Build a Stock List?
The idea of building a stock list is to set the ground rules for your stock selection process. The list helps you to focus on a small number of companies. In other words, the more time you spend building your list, the easier your stock picking activity will become. However, there is a long road between pulling out a list and getting down to a manageable number of companies.
Between the U.S. and Canadian stock markets, there are roughly 20,823 companies. If you select companies paying dividends (0.01% yield), you drop the list to 7,195 companies (source Ycharts). This is still definitely too many.
Because you don’t have the time to follow all the companies in your garden and probably don’t have enough money to buy shares of each of them, you need to select a few picks from your stock list. Hence, the importance of building a very strong stock list. Building a stock list including 1000 companies is not of any help. Then you would have to look at each individual company to see if they would be a good fit in your portfolio.
There are Existing Stock Lists for You to Pick from
If you don’t have the time or the resources to use a good stock filter, you can always pick among lists made for you. For dividend growth investors, there are already a good number of great resources you can find for free across the internet. Here’s a list of my favorite:
- Dividend Kings – 18 companies that have increased their dividend payment for over 50 consecutive years.
- Dividend Aristocrats – 50 companies that have increased their dividend payment for over 25 consecutive years.
- Dividend Champions – 106 companies that have increased their dividend payment for over 25 years, but are not necessarily part of the S&P 500 (aristocrats are).
- David Fish lists of Dividend Champions, Contenders and Challengers (basically all the list of companies that have been using the path of dividend growth)
- Canadian Dividend All-Star – a compendium of the best Canadian dividend paying companies updated monthly by Dividend Growth Investing & Retirement
These are among the best free resources I’ve found so far on the internet. Each list is updated and the information is accurate. This could save you lots of time when you are looking for a new addition to your portfolio.
For those who are like me, you probably prefer build your own stock list with personalized metrics. What I don’t like about the existing lists is that they focus on past dividend growth history, but they don’t do much to tell me if the company will continue to perform in the future. This is why I build my own stock list.
Which Criteria Should You Use for Your Stock List?
Each time I want to make a purchase, I follow the 7 Dividend Growth Investing Principles. I don’t only look for companies growing their dividend, but for companies that will continue to grow and perform in the future. For me, the dividend growth is as important as the stock value growth. This is why I build my own list. Here are the basic criteria I use to build my list:
- Dividend Yield over 2% and under 6%
- 5 Year Revenue Growth positive
- 5 Year EPS Growth positive
- 5 Year Dividend Growth positive
- Payout Ratio over 0% and under 85%
- Cash Payout Ratio over 0% and under 85%
These metrics help me narrow down, below 400, the number of companies to look through. It is still a lot of companies, but I can apply additional filters to narrow down my search (thx to Excel!). The idea of using these metrics is to make sure the company is not only growing its dividend payment, but also grow two other very important metrics for its future: revenues and earnings.
My latest stock list has been pulled out in October. You can download it here:
I will use this list to build my top 2017 dividend stock eBook. In fact, the selection is almost all done, it’s now just a matter of analyzing each company and build my report. What do you think of this list? Do you use any other stock lists to build your portfolio? Let me know and I’ll add it to the article.
Interesting list. Will look at this weekend.
Thank you Mark!
let me know if you have any questions!
cheers,
Mike
No amount of research can guarantee future performance. Why should I invest my money in a stock that pays less than $3/share? Dividend.com has a stock screener, I set it to look for stocks paying at least $3/share.
What do you think?
John,
Using Dividend.com’s filter I selected c/s and pref for large market cap stocks in any industry and I entered an annual dividend payout between $3 and $25. I excluded ADR, MLP, ETF, ETN, Funds, and Notes. The results showed nothing in the database that met this search criteria. I then tried including all of them and got the same result. What figures do you plug in as the min and max in the annual dividend payout ($) search field?
While this is definitely one way of searching for companies warranting further review, I suggest your search criteria (if I understand it correctly) is leaving a lot of potentially decent companies off the table. I would be inclined to search by dividend yield % vs annual dividend payout $.
My wife and I have a number of companies in our portfolio that have performed exceptionally well over time. If I had used your search criteria wherein the company gets discarded if it does not pay an annual dividend of at least $3, I would have missed out on some of my best holdings! One example is Visa (V). We bought in April 2008 just days after their IPO. They certainly were not paying an annual dividend of $3!
The $ per share is not important. if you select a company paying $3 per share, but trades at $400, it’s not a good deal compared to a company paying $2 but trading at $50 😉
Glad to see we’re on the same page. 😉
🙂
John,
Sorry. One other thing. While I totally agree with you that no amount of research can guarantee future performance, I am reasonably confident in saying that you stand a far better chance of picking decent companies in which to invest by doing PROPER research than if you do no research or if you pick your investments based primarily (for some people “primarily” gets replaced with “solely”) on the dividend paid.
Based on your experiences, would you agree?
I think you are definitely on to something.
I like your list as well.
It’s like making a shopping list before going to the grocery store versus not making a list.
I’ve done it both ways and I think it’s better to have a list.
For beginners who don’t know where to start, do you think the Dow Jones 30 companies is a good place to start?
Hey Symbol Surfing,
I’d actually go with the dividend lists mentioned in the article 😉
cheers,
Mike
THANKS, Y’ALL
Anytime John!
Merci Mike pour la liste. Choosing a stock is one thing, selling it is another. I know that you usually say that anytime a cut in the dividend takes place, you get rid of the stock. But apart from that, let’s say you buy Home Depot, it fits in your metrics, gives you 2.11% dividend. In the next year, the price of the stock goes up, which mean it’s dividend falls to 1.5% (while actually staying the same in $). Is that a signal to sell and take your gains? Or hypothetically, for whatever reasons, sales at Home Depot go down in 2017, you still are up from 5 years ago in revenue and EPS, but the payout ratio is now above 85%. Do you sell on that?
This is not my blog so I hope Mike takes no offence if I offer my $0.02.
I have been investing for roughly 25 years and if I had sold my holdings in a particular stock just because a stock’s price went up far faster than any dividend increase I would have driven myself nuts.
Remember:
Stock prices go up, stock prices go down. Do you think Warren Buffett had any inclination to sell American Express or Coca Cola just because the stock price went up faster than the increase in the dividend? No!
Secondly, if you are holding shares in non registered accounts you would be triggering capital gains every time you sell a stock that has jumped in price. The longer you can defer paying taxes the better (in most cases).
I refer you to my comment above re: our Visa (V) holdings. The stock price increased to a far greater extent than the dividend. I would be pretty honked off today if I had sold our V just because the dividend yield was inferior to that in the past.
Let me take it one step further and this is where Mike and I may differ. If a company cuts its dividend, Mike suggests you automatically rid yourself of this investment. In my opinion, it all depends.
My wife and I have owned GE shares for ages. When GE cut its dividend did we sell GE? NO! We hung on and actually bought more shares. Sometimes you need to have the intestinal fortitude to stick with what you think is right. We figured that if Warren Buffett was prepared to invest in GE (albeit preferred shares at a very attractive rate) he figured the company would make it through its tough times. The shares have since bounced back and while the dividend has not yet been restored to historical levels, we are of the opinion that GE is still a sound investment.
Ben Graham hit the nail on the head when he said ““In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Be a long-term thinker. Ask yourself, does the company in which I have invested have a sustainable long term advantage relative to its competitors? If it does, why would you sell? Who cares if the market price goes up or down? In fact, you should WANT the price to go down!
Hey Charles,
I’m actually quite happy to see such great detailed comment on my blog, thx for being so active lately :-).
Hello François,
I agree to disagree with Charles (and this is the beauty of sharing our opinions) in regards to dividend cut. However, my most important rules as of to when you should sell a company is when it doesn’t meet the reason why you bought it in the first place (in other words, you investment thesis). I sold Wal-Mart for this reason; instead of gaining momentum, it is losing more and more time to grow significantly its online business. The market is shifting rapidly and I don’t feel WMT is in the game anymore. I did make money with WMT when I sold it, but that wasn’t important. The important part is that I don’t believe in the company anymore.
I hope it helps 🙂
Cheers,
Mike.