Following up on my recent “build an investment strategy” article series (you can read part #1 and part #2 here), I’m delving into the core topic: which metrics to use to select your dividend stocks.


    I have already shared metrics I look at and how I use them in a stock filter (read about my dividend growth model here). But we all know there is a lot more than a few ratios to choose a stock. One company can show awesome profit growth, but hide other problems in sales or debt for example. How do you weight each metric to find the right stock? It’s important to combine them and to find the “ultimate combination”. Even better than that, if you can combine all the important metrics, give them different weights and create a scoring method; what happens? You can generate a “buy list” where stocks are attractively valued at the moment you pull the list. This is our goal with the Rock Solid Ranking.


    The Rock Solid Ranking Provides a Buy List and a Sell List


    With the help of our ranking, we can rapidly identify stocks that show all the great fundamentals we are looking for. Those which score at the top of the line earns the “buy mention” while those who sit at the bottom of the ranking fall into the “sell mention”.


    If a company can’t keep up with a high ranking, it means its losing pace with one or more important metrics in our model. The more it loses ranking, the more it is closer to joining the sell list. On the other hand, a company improving its scores quarter after quarter definitely earns the buy mention as it shows it’s going towards the right direction. The Rock Solid Ranking goal is to provide an instant valuation of a stock according to our dividend growth investing model.


    I’m not going to disclose our calculation methods here but I’ll tell you which metrics we follow. This can help you build your own investing model. Total score of a company could technically reach 100% if it was perfect on all attributes. The score can also be negative as we give penalties for negative growth numbers.


    #1 SALES


    In my opinion, if you don’t sell, you can’t make money. If you can’t make money, you can’t pay dividends. If you can’t increase your sales, you can’t increase your profits and you can’t increase your dividend. This is why revenue growth is so important. The best way to measure if a company is making more money is by look at its revenue growth.


    A company can run through a tough year or show hectic revenue movements. This is why we take a look at both 1 yr and 5 yr revenue growth. The first metrics to be used in our model is:


    1 year Revenue Growth

    5 year Revenue Growth


    More weight is given to the 5 yr and penalties (negative score) are attributed to companies that show negative revenue growth. You can’t hope to increase your dividend consistently if your revenues decrease.


    #2 PROFITS


    Showing strong revenues is important, but it doesn’t guarantee you will get strong dividend payouts. Profits drive amounts to be paid through dividends. If you look at a company like Amazon (AMZN); revenues are huge but profit is thin. Therefore, they can’t hope to pay a dividend at this point in time (especially when your P/E is 574!).


    In order to make sure we don’t give a high score to a company that recently restructured its costs or sold an important asset to boost its profits, we also consider 1yr and 5yr Earnings Per Share (EPS) growth.


    1 year Earnings per Share (Diluted) Growth

    5 year Earnings per Share (Diluted) Growth


    Earnings and revenue growth combined together weigh a lot in our model. Both metrics combined together is the key for a sustainable business model. This is why so much weight (40%) is attributed to these 4 metrics.




    Once we have found companies with sales and profits, it’s time to take a look at what we are looking for the most: dividend growth potential! In order to find out if a stock is not only a good stock but a good dividend stock, we use 3+1 different metrics. The “+1” is because we look at both 1yr and 5yr dividend growth percentages:


    1 year Dividend Growth

    5 year Dividend Growth

    Dividend Payout Ratio

    Dividend Yield


    The 1 year dividend growth shows the company’s willingness (or capacity) to increase its dividend over a short period of time. The 5 year dividend growth confirms this willingness/capacity to keep increasing payments to shareholders.


    Then, the dividend payout ratio is also very important to us. We penalize companies paying over 120% of their earnings. We didn’t select 100% as we must always take into consideration that the payout is in $ and the profit is an accounting term (including amortization for example). This is why it’s important to give some room for high dividend payout ratio companies. We also give a smaller weight to companies with very low payout ratio (0-20%). This shows the company would rather keep its money in its bank account instead of sharing the wealth with stockholders.


    Finally, the dividend yield is also a debated topic. Some investors are looking at 5%+ dividend yield (I keep receiving tons of emails telling me I look for small dividend yield stocks). Some others (like me!) prefer sound businesses with dividend stocks around 3%. In the past four years, I’ve noticed that stocks paying over 4% are often showing shakier metrics than stocks with a lower yield. Dividend metrics combined together represent 40% of our ranking calculation.




    Another important data is the debt level of a company. The idea behind the choice of this fundamental is simple; debt payment requires cash flow, cash flow that could be used to pay dividends. You don’t want a company strangled by their debts and forced to make unfortunate decisions. This is why we use a debt ratio in our model:


    Debt to Equity ratio


    Here again, a high debt to equity ratio is penalized by negative points.



    Finally, the price you pay for a stock is also important. I’m the first one to pay a relatively high price for a great company. Still, if I can find a company that is relatively similar but traded at a cheaper price than another, I will definitely take a look at it.

    We have used the following metrics in our system to give points to each stock:


    P/E ratio PEG   

    Price to Book Value




    We have built our scoring model to be able to select the best dividend stocks according to our investment beliefs. It is probably not perfect and it is surely not strong enough by itself to buy a stock solely based on the ranking (read here that the scoring is NOT a buy or sell recommendation). However, it gives you a strong indication of stocks you should have in or get rid of from your portfolio.


    The full ranking is published and updated weekly on our other site; Dividend Stocks Rock. By becoming a member, you get access to

    10 US & Canadian portfolios, (including growth and conservative models)

    8 Dividend stock lists, (including high yield, aristocrats, premium and dividend growth lists)

    Bi-weekly Premium Investing Newsletter

    And the complete Rock Solid Rankings


    What do You Think?


    We were able to give value to each metric and compile them to a scoring board. What do you think of such scoring method to buy or sell your stocks? Is this something you could use to build your investment strategy? Is there any other metrics you think should be part of our model?

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  • Last week, I announced a huge promotion for my new investing website; Dividend Stocks Rock. On top of having access to my special dividend project, I combined with Pat McKeough’s newsletter services to offer everything in a special package deal at a very interesting price. If you missed this announcement, please check it out here.

    You were many to inquire more about Pat’s newsletter services and this is why I’m back here today with more details about his investing strategy.

    If you follow my blog and register for my newsletter it’s probably because you are like me: you like safe and sound dividend paying stocks! I receive many emails from readers asking me to publish more stock analyses in order to help them build their portfolios. The problem is that I’m like you: We both lack the time to follow every stock that interests me.

    Fortunately, there are other great newsletters that also offer complete stock analyses. I’m not talking about those day trading newsletters where you get some “hot stock of the day” ideas. I’m talking about Pat McKeough, Canada’s expert in safe investing newsletter. For those who haven’t heard of Pat McKeough, here’s a few things to know about him:

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    Two years ago, Pat and his team approached me to help them promote their newsletter. Since I receive these kinds of email from marketing departments every month, I was a bit reluctant at first. I actually never send any “special offers” because I appreciate your readership and certainly don’t want to spam you. This is why I asked to go through his newsletter and was granted access to past issues of The Successful Investor. I was stunned by the quality of his work.

    I’ve wrote about this before on my blog and you were many to subscribe to his newsletter via my promotion. You will be happy to know that the promotion is back! But this is only good  until March 13th!!

    The Successful Investor is an award-winning conservative investment advisory for investors interested in high-quality, mostly Canadian stocks that will surge ahead in good markets and hold their own in the face of market declines. It focuses on low-risk stocks with strong profits as well as growth potential. 


    Newsletter Insights


    I truly appreciate Pat McKeough’s stock selection approach as he favors value stocks and maintains a “Favorite Dividend Paying Stocks” watch list in his newsletter. The subscription also comes with updates on this “virtual portfolio” as well.

    Pat Mckeough says, When you subscribe to The Successful Investor you will discover…

    • Step-by-step strategies for solid gains in uncertain markets
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    The Dividend Guy.


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    What if You Could Pick All Your Stocks Based On a SINGLE METRIC?


    It’s not true; investing can’t be that easy. What if the only thing you would need to focus is a single metric and you could build a portfolio that beats the market? Nah! I don’t believe in miracles and only believe in Santa since I have three kids that also believe in the Tooth Fairy ;-).


    However, if you focus your stock research around this single metric; you will be able to beat the market.


    This is a metric that you know already and that I’ve been preaching about already; it is dividend growth.


    Here’s what I found in my stock market research:


    Dividend Growth Stocks Beat the Market


    It’s not a surprise that dividend stocks beat the market over time as 56% of the S&P 500 returns come from dividend payouts. However, I was surprised to find that companies that increase their dividend systematically also beat the market without a doubt. Let’s start with the Canadian market:


    TSX Dividend chart

    As you can see, companies paying dividends beat the S&P TSX and those who raise their dividend do even better. As is the opposite, those who cut or pay no dividend are trailing behind. This could be easily explainable since the biggest dividend payers on the Canadian market are:

    #1 Banks

    #2 Oil Industry (Oil Income Trusts in the 2000’s)

    #3 Telecom


    If you look at these 3 industries over the past 15 years, you will see how they did well… maybe it’s just something about a few sectors. Let’s look at the US market to be sure…


    S&P500 Dividend Chart


    Interesting enough, the difference is smaller for dividend paying stocks versus the S&P 500 but it is still to the advantage of dividend investors! As you can see no dividend paying stocks did almost as good as the index. There are more pure growth stocks in the US compensating with high investment returns. This graph represents a better picture of the eternal battle between dividend investing vs growth investing.


    Why Dividend Growth is SOOOO Important?


    The only metric of dividend growth is definitely not enough to convince any investor to dive in and purchase a stock. But the dynamic around a company that, year after year, increases its dividend can create great results.


    When you think about it, the only valid reason why a company would raise its dividend is because the management team believes in its capacity to generate even more profits in the future. Since we are all looking for such investments, dividend growth should be the first bell to ring in our ears when we look for another stock to add to our portfolio.


    If a company increases its dividend during several years, it also means that it makes more profit year after year. If profit doesn’t follow the dividend growth trend, the dividend payment will become unsustainable. For example, if a company makes a profit of $10 per share and pay $1 in dividend, the payout ratio is 10%. If the company increases its dividend payout by $1 per share each year and doesn’t increase its profit at all, in ten years, the payout ratio will be at 100% and nothing will be left in the bank account once the dividend is distributed. Therefore, if the dividend growth trend follows the earnings per share, you already have a great indication that the company is doing well.


    The second indicator that you must combine with dividend growth is sales. It is one thing to increase your profit (EPS) but it can be some kind of accounting magic done over a few years. Sales may not follow exactly the EPS trend; after all, during a period of intense growth, a bigger part of the budget will be allowed for operations and marketing. Once these efforts are stabilized, the company will usually generate bigger profits. On the other hand, sales can stagnate for several years and major cuts combined with the sale of important assets can increase the earnings during several years. This is what I call accounting magic. This is why it is important to see if the dividend growth is supported by both growing earnings and growing sales.


    What is the Most Important Thing to Do When You Look at Dividend Growth


    The most important thing to do is simple: look at the trend. The trend in dividend growth combined with the trend in earnings and the trend in sales will give you the perfect trio to determine whether a company should be a good addition to your portfolio or not. Looking at 5 year growth data is a great start. But you must look at each year. Once you have pulled-out the stock from your screener, additional work is required to make sure you pick the right stock for the right reasons.


    You want to pick a stock with constant growth, not just a big boom for a year or two during the 5 year period. Constant growth is found within a strong business model while a big boom could be some fluke or worse; accounting magic!


    In the end, I believe that dividend growth is probably the best metric to follow at first when you look at a new stock. However, you need to dig deeper and verify the overall fundamentals before making your decision.

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