Is there a way to build a double digit dividend portfolio? I have mine! In this article, you will discover, step by step, how you can find strong dividend growth stocks that will make your retirement a lot more fun and safe. If you worry about your future revenues, dividend growth investing is definitely something you should look into. I suggest you bookmark this post as it’s over 3,000 words .

Two weeks ago, I shared my own investing goals as follows:

#1 Adding a “stable” dividend growth stock (most likely from the consumer sector)

#2 Increase my existing positions through Dividend ReInvestment Plans (DRIP)

#3 Invest 10% of my portfolio in a US index ETF

Click here to read the rest of my 2013 investing goals.

Then, I’ve asked my newsletter subscribers what their 2013 dividend investing goals were. Many of you answered, thank you (I’m still busy answering email! Hahaha!) and one question really caught my attention. Here’s the email I received.

This email gave me the idea to write this article. Many dividend investors are obviously looking for dividend growth. Some chase the highest yield dividend stocks, while others use DRIP and the power of compound interest to boost their dividend yield. In any case, the question is always the same:

The concept of dividend investing is mainly based on a single fundamental aspect: business sustainability. If the company’s business model is sustainable, it will generate profits year after year. A good way to use these profits is to redistribute a part of them to investors. If you are able to find high dividend growth stocks, you will never have to worry about inflation and will withdraw a nice income stream from your portfolio at retirement. If you want to live off your dividends, you need to find these “magic” stocks.

Unfortunately, it’s easier said than done. Do you take into consideration the actual dividend growth? Past history? Future opportunities? The management team? What is most important? Payout ratio? EPS growth? Revenues? High dividend yield? These are the kinds of questions I will answer by sharing my method to find high dividend growth stocks. Here’s my step by step guide to building a strong dividend growth portfolio.

Step#1 – Forget About Double Digit Dividend Growth

So… it was all about a catchy title right? Not exactly. The reason why I called this post “Where to Find Double Digit Dividend Growth” is because this is we are all looking for, The Holy Grail. If I told you that I would show you a method to find 3% dividend growth stocks, you would have stopped reading by now. The point is not to find a 3% dividend growth stock and it’s not to find a double digit dividend growth stock either. I believe that I will  enjoy much better success as an investor if I select stocks that will be able to sustainably increase their dividend each year for the next 30 years rather than trying to hit a homerun and pick a stock pushing its dividend through the roof  over the next 5 years.

For example, if you look at the dividend aristocrats dividend growth policy, you won’t find any double digit dividend growth stocks over the past 5 or 10 years. However, you will find 51 stocks with a 25 years + dividend growth policy behind their tie.

Mind you, if you find a double digit dividend growth stock, this means that the company has to sustain a double digit EPS growth as well. If the profit doesn’t follow the dividend payout growth, eventually it will hurt the dividend payout ratio and put at risk future dividend growth. This is why I focus on stocks that grow their dividend by more than 1% on average over the past 5 years. The goal is to pick stocks with a solid dividend growth strategy, not just the flavor of the moment.

Keep in mind that most stocks won’t increase their dividend by 8 to 10% during a recession either. So if you look at the past 5 years, you have to include the 2008 crisis when most companies had a hard time simply keeping their dividend payout as is. This is the main reason why I search for a 5 year dividend growth of at least 1%. There are some double digit dividend stocks (and I’m giving them to you later on in this post!), but you might ignore strong companies if you just look at dividend growth. You’ll see that with my method, I rarely pick a company with a small dividend growth policy and still need to keep my eyes open for opportunities!

Step#2 – Look at the Past

Now that you have realized this and won’t solely focus on dividend growth metrics, the second step to find high dividend growth stocks is to use the past to make up your mind about the present and the future. Being a strong dividend growth stock doesn’t happen overnight. It takes years of profitability and dividend growth to make sure that the company will continue on the dividend path for the future. This is why I use a stock screener for the first step of creating my list of dividend growth stocks.

I personally use FIN VIZ for the US stocks and TMX Stock Screener for the Canadian market. I made a complete list of websites for stock research here. It’s impossible to look at the entire stock market and make sound investing decisions. You can’t simply pick up just any stock paying a 4% dividend yield and pray that it will be a good choice. On the other hand, you can’t analyze hundreds of stocks before making a trade either. By using simple metrics, you can build a smaller list of stocks that already include some key characteristics to become a strong dividend payer.

a)     The Metrics I use in Each Filter

Using a stock screener is one thing, pulling high quality information out of it is another. Here’s a list of metrics I use for FIN VIZ and TMX Stock Screener to build my lists.

TMX Stock Screener (Canadian + US Stocks):

The TMX Stock Screener is interesting as you can get the dividend growth… and you can get it for US stocks as well! So even if it’s a “Canadian Screener”, you can work with it to find US dividend stocks. The combination of FIN VIZ and TMX Stock Screener will definitely give you a complete list of great stock pick possibilities.

5 Year Annual Income Growth Rate: between 1 and 100 (if sales don’t go up, dividend growth will eventually be jeopardized).

Current Dividend Yield: over 3% (I think 3% is reasonable in the current economy. I sometimes cheat and look for over 3% in the hopes of picking a gem with a 2.75% dividend yield).

Return on Equity: Over 10% (I want companies that use my money to create wealth. Keep in mind that you’ll need to look inside each financial statement to see if the ROE is stable over the years).

5 Year Annual Dividend Growth Rate: Over 1% (I know that I told you that we are looking at double digit dividend growth but the crisis in 2008 creates some statistical data errors as several companies stopped their dividend growth approach during that period)

Current Price Earnings Ratio: Under 15 (I’m looking at companies that are undervalued. Since the average P/E ratio of the market is historically around 15, it’s a good start. I sometimes cheat and put 20 if I don’t get what I’m looking for)

Here’s what you get on the NYSE as at January 25^th 2013:

Out of 62 stocks, you get 21 double digit dividend growth stocks and 41 stocks with a dividend growth over 5%. Keep in mind that some stocks in this list are Canadian based companies (such as banks) traded on both the TSE and NYSE.

And here’s what you get on the TSE as at January 25^th 2013:

Out of 25 stocks, you get 6 double digit dividend growth stocks and 14 stocks with a dividend growth over 5%.

If you combine both lists, you have roughly 80 stocks (if we subtract Canadian stocks being traded on both markets) to build your portfolio with. If you put a dividend growth minimum of 5%, you will have about 50 stocks to pick from. This is more than enough to build a strong dividend growth portfolio!

FIN VIZ (US Stocks + Some CDN Stocks trading on NYSE)

The only bad news about FIN VIZ is you can’t get the 5 year dividend growth metric. This is why I published a list from the TMX instead of FIN VIZ.  It’s a good thing you can get them from the TMX stock screener! But this stock screener shows others metrics that the TMX doesn’t have… In order to a good research, you have to select other metrics to pick stocks that will show great dividend growth when you look at their financial statements. Here are the metrics I use:

Descriptive:

Dividend yield: over 3%

Fundamental:

P/E Ratio: under 15

EPS Growth next 5 years: over 5%

Return on Equity: over 10%

Forward P/E Ratio: under 15

Sales Growth past 5 years: positive

EPS Growth past 5 years: over 5%

Payout ratio: under 70%

If you are looking for a complete step by step method on how to use a free stock screener, I created a walkthrough guide to FIN VIZ and TMX Stock Screener in my book Dividend Growth – Freedom Through Passive Income available at Amazon on both Kindle and Paperback versions. You will get additional information on how to build your stock list from your first screens and the next step to build your portfolio for safe and strong dividend payouts!

b)    Dividend Growth History

Now that you have your list ready, it’s time to perform some deeper analysis. The process between the stock list from your screener and the in-depth analysis of a few chosen ones is not covered here as it’s a case by case scenario. Depending on the type of portfolio you have and what you are currently looking for in terms of stocks and diversification, your picks will differ greatly from another investor.

Once you’ve selected a company from your screener, the next step is to download their financial statements. If you are lucky, you will find an “Investor Fact Sheet” or “Recap” giving you some key ratios such as Earnings per Shares, Sales, Profit, and Dividend Payouts throughout the past years.

If you can’t get a hold of a one pager giving you the information right away, you’ll have to dig inside the financial statements. Take the annual reports as you will have more than one year and the info might have been calculated for you already.

When you look at the dividend growth history, it is preferable to look at the past five years. Instead of simply calculating the dividend growth annualized rate, I suggest you make a quick graph of the past 5 years dividend payout. It will give you a clear idea of which stocks have a strong dividend payout strategy compared to another. The graph can be as simple as the following:

Which looks a lot better than the following:

The first graph is a good indication of a solid company that is looking to increase its dividend year after year. For the record, the first graph is TRP dividend growth and the second graph is Encana dividend growth.

c)     How are Sales and Earnings Per Share?

Looking at past dividend history is a good start to know if the company intends to boost its dividend in the future. But there is always a will and a way, right? So the company might have a strong dividend growth history over the past 5 years, it doesn’t mean that it is sustainable.

The relation between sales evolution and earning per shares will tell you 3 things:

How is the company’s main market doing (if sales are growing or not)

How are the company’s profits growing (are they making more profit or not)

How are the company’s margins doing (if the sales and EPS graph don’t head in the same direction, that’s a red flag or very nice news for the companies’ margin)

To ensure stable dividend growth over time, it’s obvious that you need stable sales and earnings growth. Sales growth will ensure future cash flow and earnings growth will ensure that the company makes more money as sales climb. If these two metrics are negative or growing erratically, you will need to dig deeper into the financial statements to explain it or simply pick another stock to analyze.

Look at Procter & Gamble (PG)

example:

As you can see right away, there is a call to action to dig deeper inside the financial statements; the sales are going up but the EPS is trailing behind. There must be something hurting the margins or special expenses that won’t happen in the future. You need to get these facts straight before you continue further and buy this stock.

However, if you look at Colgate-Palmolive (CL) you will find a better trend (while not perfect):

Step#3 – Look at the Present

Now that you are almost burnt by your in-depth analysis, you will realize that you are only halfway in the process! Note: if picking double digit dividend growth stocks was easy, we would all be rich! Looking at the past with stock screeners and financial statements will clear most “unreliable” stocks. Now it’s time to see if this baby can keep flying. A look at the most current information about the company will give you a great hint about its ability to increase and sustain its dividend.

a)     How is the Management in Place?

Something that is being ignored too often is the management team in place. Have members been there for a while and are they responsible for the good previous performances? If so, are they still on board to continue their good work and looking toward the future or simply to get their golden parachute?

Management compensation system explained in the financial statement along with the longevity of the board will help you make up your mind about their competencies. If you are lucky, you can even learn about their dividend payout philosophy for the upcoming years. If they put a lot of emphasis on their dividend in their financial statement, that’s a great sign that they will continue to push it forward.

b)    What the Company’s Recent Quarters Look Like?

Besides pure metrics which have already been analyzed in Step #2, recent quarterly results will tell you if they are beating analysts’ expectations lately. In addition to analysts’ opinions, you will also see if the company is infirming or confirming their previous sales guidance. A good site to get this information quickly from is Reuters, as they usually report when companies comment their previous outlook for the upcoming year. This is a good way to interpret the present and forward results in the future.

Look for companies confirming or increasing their earnings and sales guidance for the upcoming quarters.

c)     What Projects are They Currently Pursuing?

While you are looking for financial ratios within the financial statements, look for current and future projects as well. A dominating company in its sector must always look towards the future. For example, Intel (INTC) has been dominant in the PC world. However, they are experiencing problems entering in the tablet and smartphone sectors. Since PC sales are slowing down and INTC is still not able to expand into other markets, future growth will be harder to achieve and margins will be reduced.

I personally looked into INTC and saw that they are multiplying their efforts in order to build their niche into other markets. Following these current projects will tell me if INTC can successfully move from their previous business model (being the leader in processor chips for PCs) to a new business model (which not only includes tablets and smartphone but also servers and hosting services).

Step#4 – Look at the Future

From looking at past financial ratios to carefully analyzing the most recent results, you should now have a pretty good idea of where the company has been and where it’s going in the future. Unfortunately, you can’t go back into the past and buy shares 5 years ago, this why you have to project these numbers into the future to buy the right stocks.

Do You Think the Company Could Continue its Dividend Payout Strategy?

A stable evolution of sales, earnings and dividend payout ratio will answer this question. If the company has proven in the past it has the ability to generate growth and manage their earnings, chances are that their payout ratio will remain stable over time. It’s important to make your own opinion of the company instead of blindly believing what you read (even on this blog!). Your own opinion will matter during stock market slides as it will confirm or infirm your decision of holding this stock in your portfolio.

What Could Possibly Go Wrong in the Next Five Years? (and would it be bad enough to jeopardize the dividend growth?)

It’s always nice to see growth, new market and technology developments but sometimes, bad things happen too! Is the company solid enough to weather a recession? What kind of impact would a sales slowdown and pressure on margins have on the dividend payout? Is the company distributing all their profits (i.e. high dividend payout ratio) or is there room for bad luck?

Once you reach this point and ask these questions, you should be able to find the answer easily within the analysis you already made. This is why it is so important to have your own opinion and facts to back it up.

Step#5 – Review Your Stock Once a Year

When you pick a stock and make money with it throughout the year, it doesn’t mean that you will continue to make more in the future. Reviewing your stock holdings once a year is a must to make sure your companies show similar metrics and you still hold them forthe  reasons why you have picked them in the first place.

The stock market evolves rapidly and it’s important to make the difference between “noise” and the company fundamentals. As a last piece of advice, I would suggest avoiding falling in love with a stock. Don’t think that a bad company will rebound and don’t expect “good picks” to be good forever.

If you follow these steps for each stock you buy, chances are that you will be building double digit dividend growth portfolio over time. Always keep in mind that you are better off with a strong company with a 5% dividend growth than a double digit dividend growth stock with shaky fundamentals.

If you are looking for more help to manage your portfolio and optimize your tax situation, you can purchase my book on Amazon (click here for more info).

This is the Best dividend Investing book your will EVER buy…

Here’s an excerpt of a review on Amazon (click on the link to read the review if you don’t believe me )

Great book – Mike (the author) is the reason I’m a dividend investor today. A guru in the dividend investment world.

This is a guest post written by a new dividend investor blogger; Frank @ Dividend Engineering. You guessed it, as many DYI investors he is an engineer .

To paraphrase John William Burr, one of the founding fathers of stock valuation, a stock is worth what you can get out of it. This simple principle applies completely to dividend investing. In fact, it is probably the basic principle of dividend investing. We, as dividend investors, buy dividend stocks to receive regular and growing payments. So, the more we get out of a stock, the better.

Keeping the foregoing principle in mind, it generally follows that we would prefer getting the most out of a stock as soon as possible. Indeed, all else being equal (I know, this is rarely the case), I prefer to receive more money now than later. And there are several reasons for that.

First, if we forgo current payment for future growth, the future growth must be interesting enough for us to wait. However, the longer we project dividend growth into the future, the less reliable our projections are. Projecting dividend growth with some measure of accuracy 5 years in the future in already difficult, projecting dividend growth 10 years or even 20 years in future is downright impossible.

Second, the higher the dividend growth, the less likely the growth will be sustainable over the long term. Understandably, a company can grow its dividend 15% per year for a couple of years. However, it would be difficult for that company to grow its dividend 15% per year for 10, 20 years. I know that some companies manage to do it but finding such companies before they do it is harder than it seems.

Third, the faster we receive the most out of a stock, in other words, the higher the yield, the faster we can reinvest our dividends into additional shares of dividend stocks. In turn, these additional shares will pay dividends which we can again reinvest into further additional shares. And so on and so forth. Understandably, the high yield must be sustainable.

So, in order to get the most out of a stock, is higher yield with lower growth better than lower yield with higher growth?

As an engineer, I like to play with numbers. So, to answer my question, I have tested three different stocks with different yields and different growths.

Stock 1 has a current yield of 1% and a dividend growth of 15%. Stock 2 has a current yield of 3% and a dividend growth of 10%. Finally, stock 3 has a current yield of 5% and a dividend growth of 5%.

In the following analysis, I have assumed an initial investment of 10 000$ in each stock. I have also assumed that the dividends are reinvested in the same stock and that the price of the stock grows at the same rate as the dividend such that the current yield stays the same. I have also assumed that the dividends are reinvested once a year. I know, except for the initial investments, the above assumptions are only what they are, assumptions. However, I think they fairly correspond to the reality, at least enough to answer my question.

The graph below illustrates the accumulated dividends of each of the three stocks over a period of 20 years.

As can be seen from the graph, over the 20 year period, stock 3, the stock with high yield and low growth, always returns more money than either stock 1 or stock 2. Looking at the trend though, stock 2 seems to be catching up. However, stock 1, the stock with low yield and high growth, is significantly far behind both stock 1 and stock 2.

In more concrete terms, after 20 years, stock 3, with its high yield and low growth, will have returned shy of 29 000$ in dividends. Following close behind, stock 2 will have returned almost 25 000$ in dividends after 20 years. However, far behind, stock 1, with its low yield and high growth, will have returned only slightly less than 12 000$.

Hence, from the graph, it seems pretty clear that stocks having higher yield, even with lower growth, will return much more money to their happy shareholders than stocks having lower yield, even with high growth. It seems to be caused by the fact the high yielding stocks allow you to compound more money, even if at lower rate. In any case, I don’t know for you, but I prefer to have 29 000$ in my pockets than only 12 000$.

Finally, the graph above assumes constant growth. However, as mentioned at the beginning, it is harder for a company to constantly raise its dividend at 15% than at 5%, the more so over long periods of time. Hence, if, for instance, stock 1 cannot sustain its annual dividend growth of 15% and must lower it at 10% 10 years down the road, then the above results will be even worse for stock 1.

So, if the high yield is sustainable and properly covered by earnings and free cash flow, I think it is better to invest in higher yield stocks, even if the growth is on the low side, than to invest in low yield stocks having higher though probably unsustainable growth.

As the say goes: “A bird in the hand is worth two in the bush.” I think it applies to dividend investing.

Here’s my trick to find the Best Canadian Dividend Growth Stocks

At the beginning of the month, I discussed about a fast lane to finding the Best dividend growth Stocks without putting too much effort into it. Is it possible to build a strong dividend portfolio without having to spend hours studying the stock market? There are no magic tricks to find the best dividend stocks, but there are some short cuts.

One of them is to follow the most important dividend growth ETFs. As ETFs gain in popularity, they constantly receive new cash from investors. This means they constantly increase their positions in their pre-selected dividend growth stocks. So by following dividend growth ETFs, you are not only doing some piggybacking on professional portfolio managers, but you are also buying stocks where there is a continuous demand.

Michel, a long time reader of The Dividend Guy Blog asked me if I could pull out the top holdings of the biggest dividend ETFs. And this is what I did!

Top Dividend Growth Canadian ETFs

I’ve pulled out the top 7 dividend ETFs by market cap:

Then, I searched through their top holdings and found 2 interesting things:

-          Out of 7 ETFs, only 3 of them are holding Canadian dividend stocks (the rest is a mix of both ETFs and global equity)

-          Out of the 3 ETFs with Canadian dividend stocks, only 3 stocks (AGF.B, ATP,   were duplicated among the list of top holdings (including 10 dividend stocks per ETF).

So this means that depending on where you invest your money amongst XDV, CDZ and ZDV, you will earn a very different return! Nonetheless, I’ve broken down the top 27 Canadian Dividend Growth stocks in regards to their holdings:

Best Canadian Dividend Growth Stocks For Real?

After pulling out this chart, I can say that it looks weaker than the US Top Dividend Growth holding. There are some very high dividend yield stocks which I’m not too sure I would pick for my portfolio (notably ATP which is currently losing money right now).

As the strategy of looking at the top dividend growth ETFs’ holdings in the US seems to work well, I’m not convinced I would use the same strategy with Canadian stocks. What do you think?

You Want More Tricks To Buy Dividend Growth Stocks?

If you are looking to:

Save Time

Make Money With Dividend Stocks

Avoid Tax Traps

Check out my book, there is a ton of insightful info on how to buy, manage and sell your dividend stocks!

DOWNLOAD YOUR COPY NOW

There is a fast lane to find the best dividend growth stocks…

If you have been following The Dividend Guy Blog for a while, you already know that chasing high dividend yield stocks or picking in only one sector won’t do it if you want to build a strong dividend growth portfolio. There is only one way to build such a portfolio and it’s to pick among the best dividend growth stocks. I’m not the kind of investor who’s looking for a fast lane to pick-up “hot stocks” but I found a way to “secure” your dividend stock picking process.

But first, here’s some information for those who think that we have entered into a dividend bubble.

Is It The Time To Invest In Dividend Growth Stocks?

There is a rumor in the trading industry that says that we have entered in a dividend stock bubble. The rumor states that dividend stocks are mainly bought by investors seeking for a steady yield. When you look at the overall S&P 500 dividend yield vs the 10 yr Treasury Bond yield, you can understand why:

Since 2011, the S&P 500 dividend yield is paying more than the 10 yr bill! This simply means that you can’t find a good yield in bonds, certificates of deposit or treasury bills. Buying solid dividend growth stocks seems quite attractive as you can easily earn a 3% dividend + hope to see your stock value grow over time.

This is why investors, portfolio managers and even ETFs have poured their assets massively into dividend growth stocks. The first money movement was targeted on high dividend yield stocks. If there is a bubble growing, it is probably that part of the dividend stocks you want to avoid; stocks with dividend yield over 4.50% may be too pricey for the moment. However, it doesn’t mean that the whole market is expensive.

In fact, the average P/E ratio for dividend stocks is around 17 right now. Historically, these same stocks were sold at 20. This tells me that they are still trading at a discount. To be honest, I still believe the overall US market is trading at a discount right now, so this is in line with my own theory. On the other hand, a high dividend yield sector such as Utilities currently shows a P/E ratio around 28. It’s useless to say that you are now paying a high premium to earn dividend payouts from this sector! Industrial and Financial sectors seems to be the best bets for undervalued stocks vs dividend yield at the moment.

Coming to the Ultimate Tip to Find the Best Dividend Growth Stocks

The reason why I’ve made such a long intro wasn’t to plug a nice graph and tell you that dividend stocks are cheap right now. It’s also not to show you that dividend growth stocks are better than the average stock market (you know that already, don’t you?). I wanted to make a point; the point is that everything is pointing towards dividend investing.

While dividend investing has always been somewhat popular, I think it’s earning a new edge due to the super low interest environment we are in. There are no other choices for retirees but to take a leap of faith and invest a part of their money into dividend growth stocks. But this is darn scary for anyone who has never really played the stock market before. And what do people do when they feel uncomfortable about something? They turn towards professional help. This is why mutual funds and ETF portfolio managers smelled the money from profits and boosted their dividend investing product offerings. If you have little to no experience in buying stocks, the smart and logical things to do will be to invest in a diversified and professionally managed investment product. This is why dividend mutual funds and dividend ETFs grew like wheat in Central Canada for the past five years. Here are a few of the most popular dividend ETFs:

As you can see, I posted 3 dividend growth and 2 high dividend yield oriented ETFs. The most important column in this chart is the last one: the market cap. Solely within these 5 dividend ETFs, there are $37 billion invested. This tells you one thing: Dividend ETFs are boosting several dividend growth stock values on the market.

Check Out the Top Holding Dividend ETFs

By selecting stocks from top holding ETFs, you gain a lot of benefits:

#1 You buy a stock that has been professionally selected by most dividend portfolio managers (reducing your potential trading losses)

#2 You make sure that there is some kind of value support on your stocks (as most investors will reinvest their ETF’s dividends back into the ETF itself which will buy more of these stocks)

#3 You make sure that there is a potential for growth in the value of your stocks (as most investors are turning towards dividend investing, this should increase the demand for dividend growth stocks)

I’ve looked at some of the biggest dividend ETFs and here’s a short list of top dividend growth stock holdings currently held (in alphabetical order)

Top Dividend Growth Stocks Held In Dividend ETFs

I was happy to find 3 of my own stocks on this list (KO, CVX and JNJ). You can also read my stock analyses for the following companies:

Colgate-Palmolive (CL)

Chevron Corp (CVX)

Kimberly-Clark (KMB)

Johnson & Johnson (JNJ)

Coca-Cola (KO)

McDonald’s (MCD)

PepsiCo (PEP)

Procter & Gamble (PG)

AT&T inc (T)

There are a lot of dividend growth stocks from the consumer sector in this list. This is a great way to build your core dividend growth portfolio. However, keep in mind that since they are “popular stocks”, they may be trading at a higher P/E ratio. Therefore, you buy these stocks for their dividend growth potential but forget about a surge in the stock value!

Warning: I’m not telling you that blindly buying the top holdings of any ETF will work. In fact, you can simply buy the dividend ETF instead and save on trading fees. But if you apply your own stock screening process and find similar stocks amongst the top holdings in dividend ETFs, you have a good indication that these stock values will be supported for a long time.

You Want More Tricks To Buy Dividend Growth Stocks?

If you are looking to:

Save Time

Make Money With Dividend Stocks

Avoid Tax Traps

Check out my book, there is a ton of insightful info on how to buy, manage and sell your dividend stocks!

DOWNLOAD YOUR COPY NOW

disclaimer: I own shares of KO, CVX, JNJ

As you probably know already, I’ve recently launched 2 dividend investing book (a Canadian Edition and US Edition). This is a quick excerpt from the book…

US Edition		Canadian Edition
Click here to Download		Click Here to Download

Is there anything more fun in finance than looking at your next stock pick? This is a moment of fun and excitement as you are about to put your money at work!

The first thing you will need when you look at your next purchase is numbers. I personally think it’s the easiest way to build your portfolio: you start with filtering the right stocks through a bunch of numbers. Unfortunately, it’s not that easy for Canadians as most free stock filters won’t give you all the information you need. So instead of blindly stating key ratios, I’ll show you how to do your search with free Canadian stock screeners. But before we get into that, first you need to know what you’re looking for, right?

Dividend Yield > 3%

Since you want to build a dividend stock portfolio, the very first thing you should be looking to is the dividend yield. Personally, I don’t like dividend stocks with a yield under 3%…. unless I know that a company is about to undertake a very aggressive dividend increase policy. I will, however, usually consider lower dividend yield stocks from US companies as they will count as the “secure” section of my portfolio. For example, I hold Coca-Cola (KO) with a dividend yield at 2.78%. However, since KO is diversified and sitting on tons of cash, I consider this stock more like a bond than a stock. On top of that, KO shows the historical habit of doubling its dividend payouts every 6.5 years.  But let’s return to the concept of 3%+ dividend yield Canadian stocks!

There are over 100 stocks paying a more than 3% dividend yield in Canada, so don’t you think that’s enough for you to start your search? This is why I usually ignore lower yield stocks for my Canadian assets. On top of that, receiving a 2% dividend is like getting paid a few loonies for shovelling snow out of your driveway; it just doesn’t cut it!

5 Year Dividend Growth > 1%

Some people may argue that I’m being generous by allowing some companies with a 1% dividend growth over the past 5 years into my searches. Well, the thing is that we all went through 2008 and several companies had to suspend their dividend increases for at least 2 years. Even Canadian banks put their dividends on hold–even while they were cashing astronomic profits. That’s why I’m giving some of these stocks a break by looking only for companies that were able to increase their dividend over the past 5 years. For the record, when I played with the TMX stock screener, I went from 22 to 13 stocks just by changing the 5 years dividend growth from > 1% to > 5%. In my opinion, 13 stocks is definitely not enough to build a solid portfolio.

Return on Equity (ROE) > 10%

Another important consideration is the ROE.  In fact, the ROE is very important. It relates to the ability of a company to generate profits from the investors’ money.

Return on Equity = Net Income/Shareholder’s Equity

I’m looking for companies able to generate over 10% on shareholder’s equity. This shows that the company is able to successfully manage the money invested and that it has a solid plan for growth.

5 Year Annual Income Growth Rate > 1%

Then again, we are looking for growth. That’s why I want a company that is able to grow its income over time. Since 2008 is getting in our way, I’m looking for companies that were able to grow by at least 1% their annual income over the past 5 years. If you want your stock to increase its dividend over time, you want to pick companies with income growth.

Current Price / Earnings Ratio < 20

Historically, the S&P TSX (Canadian Index) has been traded around 15 to 16 P/E ratio. Therefore, If you are able to pick lower P/E ratio stocks than the average, chances are that they are undervalued and that both their stock and dividend will soar in the coming years.

There is one more thing to consider when you look at the P/E ratio: you need to compare it to the company’s industry. For example, Canadian Banks P/E ratio sector has always been under 15, so it’s not a big surprise to find the big 6 in this category if you run only this filter in your stock screener. On the one hand, Canadian Banks are definitely good investments, but at the same time, don’t buy them in the hope of seeing their stocks going back up to a P/E ratio of 15.

Dividend Payout Ratio < 75%

If you are looking for dividend growth stocks, the dividend payout ratio must be one of the very first things you look at. Why is listed as the last ratio of this section? Simply because you won’t be able to find it through a free stock screener! I know, life sucks sometimes! Therefore, you will have to calculate it on your own.

This ratio is very important as it tells you how the company will pay its dividend. If the ratio is close to 100%, that means the company will have to eventually consider financing its dividend (through debts, more equity or selling assets)–which is pretty bad in all cases. The other catastrophic scenario would be a dividend cut. That’s why you want to stay away (as much as possible) from a high dividend payout ratio. If the company is at a growth stage, you can extend yourself up to 75%-80%… however, the best case scenario would be to pick stocks under 60%.

The Dividend payout ratio is not that complicated to calculate if you follow this simple formula:

Dividend Payout Ratio = Dividends per Share / Earnings per Share

How You Can Apply Those Ratios With Real Stock Picks

In my latest book; Dividend Growth: Freedom through Passive Income, I explain how to use ratios and free stock screener to start your journey into dividend investing. You will also learn how to invest in both Canadian and US stocks without being penalized by currency changes and withholding taxes. Check out my book now and let me know what you think!

US Edition		Canadian Edition
Click here to Download		Click Here to Download

Cheers,

Mike.

image credit

“A Pure Masterclass to Build a Dividend Growth Portfolio”

“4.5 Stars Rating On Amazon!”

3 Major Concerns Raised by my Readers

3 Solutions Found To Improve Your Returns

#1 Invest In Foreign Stocks Without Paying Tons of Taxes

#2 Find Triggers To Buy And Sell Stocks and Make Money Out of it!

#3 Generate Impressive Dividend Growth by Managing Your Portfolio as a Whole

Answering These 3 Concerns, I Wrote This Book

Dividend Growth: Freedom Through Passive Income

And I’ve Written 2 Versions and Tailored it for Both Americans and Canadians!

What’s Inside?

The Most Amazing Dividend Investing Content Ever Written

Custom Investing Strategies

Investing in Foreign Stocks Without Paying Useless Taxes

Use the Right Triggers to Buy and Sell Stocks

Access to REAL Portfolio Model Example

Still Curious?  Take a Look at The Table of Content

 (Canadian Version Example)

Did You Know Dividends Represent 58% of the Stock Market Return?

Over the past 40 years, 58% of the stock market return was produced by dividends. Dividend stocks maintain a more stable value over time (meaning less stress for investors) while producing a constant cash flow that is more than sufficient to cover the inflation rate.

Most Importantly

I’m not a financial guru, but I do have extensive experience investing.

You won’t get stock recommendations but you will get stocks on my radar list.

You won’t learn how to make money on the stock market, but you will learn how to invest carefully.

You won’t become a tax expert, but you will understand the implication of holding Canadian dividend stocks in your different types of accounts.

Finally, you’ll get a series of quotations from Oscar Wild and a few other celebrities (because I find them funny)!

Are You Ready to Build This Powerful Dividend Portfolio?

Get your copy of Dividend Growth: Freedom Through Passive Income

 (Buy through Amazon for both Kindle and Paperback copies)

Believe it or not, we are not heading in the right direction when we look at retirement planning issues. I’m not talking about the markets here. In fact, the markets should not do so bad in the upcoming years (I’m an optimist by nature!). But Government pension plans as well as many other companies’ pension plans will let you down big time. In a few years, we will be hearing a lot of “we are sorry, but…” stories like “we are sorry, but you can’t retire today with a full pension”.

Why Government & Other Pensions Will Reneg on Their Promises

From 2003 to 2007, there was some kind of stock market party going on. The economy was booming so hard that the USA had hit its full employment capacity. Virtually, unemployment couldn’t have been lower than that. The Canadian economy was literally fueled by oil sands and everybody was eyeing the day that the barrel would hit $200. From Jan 2003 to Dec 2007, the S&P 500 jumped by 69%:

Those hyper periods on a stock market are always very dangerous for pensions. You would think that companies would benefit from such market booms. Well they did… but not the way you wish they would!

Technically, companies would continue to make their payments to their defined pension plans to ensure their employees enjoy a solid retirement. During a market boost, companies should be ahead of their plan and show a solvability ratio over 100%. But companies are greedy animals. They look at their actuarial calculations and noticed they were in advance in their pension plan contributions. What’s the best thing to do in such a situation? You guessed it right: they slowed down on the contributions. Instead of contributing to the pot, they let the market returns compensate for their contributions. There wasn’t any problem since their pension plan solvability ratio was more than healthy.

After 2008, several companies saw that same ratio head under water. To this date, roughly 75% of pension plans are still underfinanced. The thing is that over the past 5 years, the stock market is showing a 0% return. While inflation and actuarial returns were calculated, most pension plans are falling behind as they are still showing a value similar to those prior to 2008.

Government pensions are not clearly reported but you can guess that if companies have a hard time generating investment returns, it’s no different for the Government. If they don’t let you down on your pension, this will mean that they will finance your monthly payments through more debt. Here again, this is not a sustainable solution.

It’s Already Starting

What was the main reason why GM almost disappeared in 2008? There was definitely a problem in their branding but the world’s largest auto constructor didn’t fail because of bad cars. It failed because their retired employees were more numerous than their actual employees! How can you compete efficiently when more than 50% of the staff you are paying is not even working??

Over the past few years, we have seen several companies go from a defined pension plan to a defined contribution pension plan. Here’s the major difference between the two plans:

Defined pension plan: Both employees and employers contribute to the pension. Your pension amount is already known in advance. It is usually a simple calculation based on a percentage of your salary multiplied by the number of years worked. If there is not enough money in the pot to pay your pension, it’s up to the employer to cover the difference.

Defined contribution pension plan: Both employees and employers contribute to the pension. Contributions are put together to be invested. There is no way of knowing your pension amount at retirement as it solely depends on the investment return your pension account will generate. Therefore, if you hit a few bad years on the stock market, you might end-up working a few more years to build a bigger pension.

There is no question that defined contribution pension plans are a huge relief for employers as they know in advance how much the plan will cost (their bi-weekly contribution on your pay stub). If you don’t have enough to retire at the age of 65, it won’t be their problem anymore. In addition to that, this situation gives them more power over their older employees.

Aging Is Not On Your Side

An aging population comes with two majors problems when we look at retirement.

#1 People are living older and older. This means that if you stop working at the age of 65 and you live until 85 or 90, you will definitely not have enough money saved aside. You will work for roughly 35 years and try to live on your savings for 20 to 25 years. It is mathematically very hard to make this work.

#2 There are less and less people working to pay for pensions. At the moment, the 65+ population is growing at a 2.1% rate while the rest of the population is growing by a 0.8% rate. This clearly shows you that each year, there are more retired individuals counting on less employees to pay for their pensions. Do you really think that Governments can support this situation forever?

In both France and Canada, the official age of retirement to get your pension was moved from 65 to 67. I won’t be surprised to see it moved to 70 in ten years or so. The reason is simple: people are living too old these days. When the government pensions were set, people used to retire at 65 and die within 10 years. Now, they want to retire at 60 and will live until 90. This creates a huge gap in the actuarial calculations!

Inflation Is a Sneaky Enemy

The concept of inflation combined with an aging population can create disastrous situations. 50 years ago, the concept of inflation during retirement wasn’t that important. Most people would not live more than 10 years as retirees so the cost of life wasn’t increasing by that much. But now, imagine if you live 30 years as a retiree? If you need $30,000 per year at retirement, you will need $62,927 per year 30 years later to cover the same expenses! This is only at a 2.5% inflation rate!

The problem is that most defined pension plans are not covered or only half covered for inflation. This means that if you retire today with $30,000, your pension won’t be indexed to follow the increasing cost of living. At one point, you will have some problem paying for your lifestyle and will have to cut down on travel, nice restaurants or your new car…

If The Money Is Not In the Pension Plans, Where Is It?

Ahhh, that is the question! If nobody will pay of your retirement, who will pay? The money is actually in your pocket! Sorry to tell you this, but chances are that if you don’t put up your own savings, you won’t be able to aim for a comfy retirement.

By saving more money and investing it by yourself, you will become the master of your retirement. I don’t know about you but I would rather handle all the variables when it comes down to planning my retirement. This is why I’ve started my own retirement account even though I’m in a defined pension plan. I count Government and employer pensions as plan B but I want to make sure I have enough on my own to retire by my own means.

How You Can Build Your Own Pension Plan

There are several retirement accounts that can be used to create your own pension plan. In the USA, I think the Roth IRA is the best one since it gives more flexibility. In Canada, the RRSP and the TFSA are two types of accounts that can help you build some nice savings for retirement.

Then, a simple excel spread sheet can make it easy to know how much you will get at retirement. I like to keep things simple so I only take my amount of savings and use a 5% investment return (including dividend yield ).

For example, if you save $10,000 per year for 30 years at 5%, you will have $664K. Then, if you want to withdraw money for 25 years and maintain that 5% return, you can withdraw roughly 47K per year. These are very basic calculations but they give you an idea of how much you need to retire. You can also use a lower investment return such as 3% to factor for inflation.

Tactical Asset Allocation

The most important part of your retirement plan is your asset allocation. Depending on your risk tolerance and retirement needs, this will fluctuate from one individual to another. Personally, I’m better off with a 100% stock portfolio with a few “safe picks” such as KO or JNJ. I don’t expect them to grow like crazy in the upcoming years but I expect them to pay a nice and healthy dividend. These are like my bonds.

Using a bond fund or ETFs could be a very good idea if you don’t want to manage this part of your portfolio. I would personally prefer a bond fund because managers can play on bond spreads while ETFs don’t do that. With a very low interest rate environment, you will get more from capital gains generated by bond spreads than interest rates.

If you want to learn more about asset allocation, I suggest you read my first free eBook on Dividend Investing. I provide tools to find your risk tolerance and help you understand the power of asset allocation.

Make It Happens With Dividend Growth

If you haven’t read this piece, I strongly suggest you read The Power of Dividend Growth. The reason why I decided to use dividend investing to plan my retirement is the fact that dividend growth will compensate for inflation.

The key is to select companies that will increase their dividend by more than 2.5% each year. Therefore, your dividend payouts will follow the rate of inflation. At retirement, the ideal scenario would be to live off your dividends. For example, if you need $40,000 per year to live, at a 4% dividend yield, your portfolio should worth $1M. If you can achieve that, you will be able to live off your dividends for the rest of your life without having to use any capital.

The $40,000 dividend will increase by more than 2.5% and will always cover inflation. Therefore, a $1M portfolio would be the perfect scenario for someone who wants to retire without any worries. If I take my previous example where I save $10K for 30 years, a $664K portfolio would generate $26,560 per year. You will definitely earn a few bucks from a Government pension even if it won’t be the jackpot. However, it is very feasible to reach $35K by combining your dividends and government pension. As you can see, there is no magic here. However, it requires a lot of discipline to save money towards retirement… To be honest, I’ll have to put more savings aside as I’m 31 and I’m not saving 10K per year at the moment… This is definitely something I need to take control of!

Are you planning to set up your own retirement plan or are you leaving that to your government and employer?

To What Point Are You Blind When Looking At Your Dividend Stocks?

Have you ever heard of what investors call the “value trap”. A value trap happens when a stock is trading at a very appealing P/E ratio. Investors think they have found the deal of the year and they buy it without thinking further. The problem is that sometimes, the stock is a value trap: it’s worth a lot today, but the economics around the stock will eventually lead the company to be less profitable. This is why the P/E ratio will never go higher. Investors are then stuck with shares trading at a low P/E ratio but they will never catch up and go back to a higher multiplier. This is the value trap. Now, there are also dividend traps!

Dividend Investing is definitely one of the most popular and successful ways of investing. But it doesn’t mean that it works all the time. The whole point of dividend investing is obviously to get paid regardless what is happening in the markets. Some investors are so used to receiving their dividend distributions that they forgot they don’t own certificates of deposit and they are not receiving interest. Dividends are not 100% secured. In fact, dividend investing can also bring you big losses. There are some pitfalls you must avoid during your dividend investing journey:

#1 The High Dividend Yield Trap

If you have been following this blog for a while, you should have learned that the dividend yield should not be a factor in your investment process. Actually, as long as the dividend yield meets a minimum requirement (mine is set at 3%), you should not prefer a stock because it pays better than another one.

The high dividend yield trap is caused by greed. Investors are nostalgic from the time when we used to have Canadian Oil Income Trusts paying 8-9% with steady monthly distribution (anybody still hold ERF?). If you are still looking for high dividend paying stocks, you are heading towards the high dividend yield trap. This means that you buy the stock for its distribution. Unfortunately, there is a small print at the bottom of your trading slip: it says that the stock is unlikely going to continue paying its high dividend!

In the current market, there is one reason why a stock would pay higher than 5% in dividend; it’s because the dividend payout is not sustainable. If the market doesn’t think that the company will continue to pay its dividend, it starts selling the stock. The price goes down and the dividend yield goes up by default. If the dividend yield has increased significantly over the past 12 months and it’s not because the company is increasing its dividend, you are in a high yield dividend trap. Here are a few stocks that may represent a trap:

#2 The Being Paid To Wait Trap

We often hear about the good side of dividends during bear market as you are being paid to wait. We all know it’s not the right time to sell when the market is down. While your stock might take a 15% slump, you still earn your juicy dividend of 3-4%. This reduces your paper loss and encourages you to keep your stocks longer. But is the distribution enough to keep you waiting five years?

Pfizer (PFE) is a good example. Over the past 5 years, the stock has generated a big 1.66% investment return (dividend excluded) and over 10 years; we are at -17.91% (as at July 31^st). Is the 3.64% dividend distribution enough to wait that long? It’s even worse in the case ofPFE since they cut their dividend back in 2009 during the financial crisis.

Closer to my portfolio, my recent experience with ZWB proves that the dividend yield is not enough to keep you waiting. After a year, I lost money on this trade while making a juicy 8% dividend yield. However, when I combined my dividend payout with the portfolio value, I was still at a loss. I sold ZWB and bought STX (Seagate Technology) instead. This is how I made by my money back in just three weeks. Will I continue to ride STX now that their latest results missed analysts estimate for the first time in 5 quarters? That is a pretty good question!

Because we buy dividend stocks for dividend growth.

Because we buy dividend stocks with a long term view.

Because we get paid quarterly for our patience.

Dividend investing also causes procrastination! We comfort ourselves as investors by thinking that we are not day traders and that we should buy solid companies paying steady dividends. This is why so many investors want to keep their investments for life. But the problem is that they keep the wrong stocks in their portfolio for too long.

Receiving a check every three months should never be a reason to keep a stock. Don’t become a lazy investor because you are watching your dividend yield more than you look at your portfolio value. You might be holding the wrong stocks that are vegetating around 1% growth while other companies are growing faster and still pay dividends. In order to not fall in the “being paid to wait trap” I suggest you reassess the reason why you bought your stocks on a yearly basis. If the reasons are not there anymore, there is only two options left; get stuck in the trap or sell!

Here’s a few examples of stocks with no returns over the past 5 years.

#3 The High COP Dividend Trap

This third trap was brought up in a comment from Richard on “When Do You Sell When You Make Money?”. He mentioned that he keeps a few stocks paying very high dividends based on their cost of purchase (COP). If you do a good job with your stock selection, you will eventually get stocks paying 8% to 15% dividend yield based on your cost of purchase. In fact, the most courageous of you who bought Canadian Banks back in December 2008 are probably earning 25% dividend yield on theirCOP! This, unfortunately, is quite an exception.

More realistically, if you buy a company like Coca-Cola (KO) which historically doubles its dividend payout every 6.5 years, you will be earning a 7-8% yield in ten years. Then the catch is similar to the one found in the “being paid to wait” trap. Would you take your steady 8% dividend yield from a company that might only go down or would you restart with a fresh company paying a *small* 3% dividend yield but which is very promising? For the record, I’m not saying that KO should be sold because it’s going nowhere; I’m just taking the company as a good example.

In fact, when you look at the dividend aristocrats you have great examples of stocks that are continuously increasing their dividend payouts but don’t necessarily provide capital gains to investors. Here’s a quick list of underperforming aristocrat stocks over the past five years that are providing highCOP dividend yield:

Cincinnati Financial Corp (CINF)

Pitney Bowes (PBI)

Sysco Corp (SYY)

Nucor Corp (NUE)

I totally understand that 8% yield is quite attractive. It’s actually the whole point of becoming a dividend investor; to seek dividend growth. You might have made a brilliant choice a few years ago, but it might not be the case today. Sometimes, you are better off selling your stock at profit than cashing your 8% dividend yield without real return.

Or you can also look at stocks that have a 3% dividend yield and a high 5 years dividend growth. I think that those 2 metrics combined could show some interesting picks:

It All Comes Down To Portfolio Management

I guess the hardest part of investing is not to buy or sell a stock but to manage the portfolio as a whole. It’s as important to select the right stock as it is to sell it at the right time. This is why a good review of your portfolio and the review of fundamental characteristics of each stock are important to be made on a regular basis. Don’t become lazy because you are getting paid. You have the right to grow your portfolio too!