A Dividend Growth Investment Strategy

I.Q. Trends publishes a newsletter that is focused solely on stocks that consistently grow their dividends. Their concept is that stocks have periods of high and low prices, and subsequent dividend yields, and the key to being a successful investor is to buy during these periods of low price and high yield. Over the long term, you should come out ahead. They explain three reason for their focus on dividend yield:

* Dividends meet the most basic of all investment fundamentals, income.
* Consistently rising dividends best reveal a company’s profitable progress.
* Dividend trends are more reliable and less erratic than earnings trends.

In terms of pricing, the team defines overvalued and undervalued in terms of quality of investment – namely:

In the Undervalue area (buying area)
* Dividend yield is historically high and price comparatively low.
* Downside risk is minimized because an unlikely higher yield would result from a drop in price.
* Substantial price appreciation potential exists in the range from Undervalue levels to Overvalue levels.
In the Overvalue area (selling area)
* Downside risk is great, since price will ultimately decline to Undervalue.
* With characteristically low dividend yield, further appreciation is usually restricted unless a dividend increase raises the price levels at Overvalue.
* A sale should be made to preserve and prevent shrinkage of capital.

The source for this material is here. The thing that I am not sure about when reading their material is the selling philosophy – they state that a sale should be made when a stock hits the overvalued level. Their focus is on preserving capital, which at the end of the day is what investing is all about (you don’t want to lose money!) so selling to lock in gains makes sense. However, as I have written about before there is much to be said about compounding growth when you hold on to a stock through thick and thin – many (but not all) stocks that continually increase their dividend tend to increase their share price. Selling these types of stocks will only create fees to your account, especially if you have to re-buy at a later date. An investor still needs to decide their own selling philosophy and stock to it – the newsletter does this for you but you have to be 100% comfortable with the buying and selling.

In summary, I may one day give the newsletter a try. Until that time, I will just continue to look for stocks continually raising their dividends and seeing where the current yield fits in with the historical one.