My fellow blogger Dan Mac at Dividend Growth Stock Investing has just launched his first book on Kindle!

I was lucky enough to get a free copy (and I’ve forwarded the link to my newsletter subscribers on Monday so a bunch of my readers got it for free as well!) so I thought it would be a good idea to get the word out. You can buy the Top 35 Dividend Growth Stocks book for only $3!

1 Book – 2 Parts – 35 Stocks

Dan’s book is separated in two parts. The first part of this book talks about dividend growth investing theory and the metrics he uses personally to pick his stocks. Overall, this part is pretty straight forward and easy to understand if you have already started investing.

I agree with Dan’s investment thesis and the metrics he uses to find dividend growth stocks are pretty similar to what I use (with only a few differences here and there). After all, every dividend investor has their own way to look at a stock and this is what makes all our blogs interesting!

I don’t know if you are like me but I went through the first part in a hurry in order to get to the top 35 stock picks he suggests. Part two of his book shows 35 stocks with dividend growth potential. You can find a few metrics along with a resume of each company. The part I like the most in these analyses was the investment thesis explained for each stock. Dan is basically giving you a reason to buy each of these stocks.

A Few Things Missing in This Book

I would have liked to have a little bit more info on the potential downside of each stock pick. I think that behind each reason to buy a company, there is also a reason to avoid buying it. It could be potential competition, economic slowdown, new projects not working as anticipated, etc. Having more info on potential risks could be interesting.

The second thing I would like to see now is the tracking of his 35 stocks. I don’t know how long he has been tracking them, but it would be interesting to see how they do in the future. After all, we are all investing our money to make more, right? Therefore, the point is to know if these selections will beat a benchmark.

I didn’t track the picks in my small eBook for 2013, but I’m following my results live each month on this blog so you can see if I’m picking stocks based on my 8yr old’s advice or if I truly analyze them and perform research before writing my book. I hope Dan will do the same on his blog in a few months, this will be interesting!

Is It Worth Your $3? Are You Really Asking?

The book is now for sale on Amazon for the small price of $3. Don’t think it’s not worth it because he didn’t charge much for it. I’m selling my own Best 2013 stock picks for $2.99 and I’ve put a lot of work on it. The point is you get rewarded as an author over the volume you sell, not the price per unit sold!

So $3 for 35 stocks picks definitely worth it in my opinion. You will get a great list of stocks to add to your watch list as Dan already did the hard work for you. Between you & I, you don’t have much to lose by purchasing the book .

More seriously, I think it’s truly worth your time and your bucks. For the price of a coffee, you will get enough material to start hunting for new stocks. Mind you, he is covering 100% US stocks only. I know that several of my readers are Canadian, so it’s good to know that you won’t be finding any good places to put your loonies in this book .

Have you read the Top 35 Dividend Growth Stocks by Dan Mac? Tell me if you like it!

I’ve read a lot of comments about the potential dividend bubble for the past 12 months. Some investors are afraid to see so much money leaving bonds and money market funds to be piled into dividend paying stocks. Most investors are craving for revenue and dividend stocks are pretty much the answer to this desire… unless they continue to starve with their bonds and CDs paying less interest than I pay my kids!

But the fact remains: dividend investing is far more solid than a simple bubble created by a few retirees looking to receive a big fat check every month. While this investing strategy might look like flavor of the year since 2009, I can tell you it will continue to work out for decades to come.

Dividend Investing has Outperformed the S&P 500 Since The Very Beginning

You can do some research on the internet, the conclusion will always include the same fact: dividend growth stocks generate a better return than pure capital appreciation. In fact roughly 50% of the total stock market return comes from dividend payout. Trying to select pure growth stocks without dividends is like claiming you can ignore 50% of the stock market return in your portfolio.

But following a few case studies and buying dividend stocks for that sole reason would be a bit simplistic… even borderline stupid. It’s your money after all, are you here to make money or to gamble it on some geek studies?

Let’s dig deeper to see if there is a reason why dividend stocks are better than any others…

Dividend Payouts Require Cash Flow

By definition, a dividend is paid from a company’s after tax money. Therefore, the company must first generate sales, then earn sustainable profits, pay its taxes, save/invest for the future… and then pay dividends to its investors. There is no point of bleeding the company’s cash flow into dividends simply to please investors. Most companies paying a dividend because they make money and believe they will continue to do so in the upcoming years. Isn’t this the first reason why you would buy shares of a business in the first place: because your investment will generate positive future cash flow? A company paying dividends strongly believes in its ability to do so.

Dividend Growth Requires Profit Growth

Thinking that any stock paying a distribution is a good fit for your portfolio would be, here again, kind of ridiculous. There are multiple reasons to pay dividends besides having a sound balance sheet:

It may want to attract more investors, pushing the stock value higher.

It may be done to please a major investor who wants its money back.

The management might have overestimated their capacity to growth their business in the future.

The management might have underestimated competition.

Since picking just any stock with a dividend yield is not sound investing practice, the second step would be to pick a stock with a positive dividend growth for at least five years. You can become quite picky and require stocks with up to 25 consecutive years of dividend growth. They are called the Dividend Aristocrats.

A constant dividend growth requires, by definition, a constantly growing profit. Therefore, if you pick a company that increases its dividend payouts by 5% for the past 10, 15 or 25 years, chances are its profits are following the same trend. I’m asking you once again: wouldn’t you like to buy a company that believes whole-heartedly in its ability to generate future positive cash flows PLUS showing a strong history of profit growth? We are getting closer to what any investor would call a “perfect investment”, right?

Profit Growth Requires Sales Growth

It is true that a company could cut its costs for a few years and generate profit growth this way. This is a good solution to cut fat but management must make sure it doesn’t cut too much and jeopardize future growth.

This is why I like to combine both sales and earnings per share on the same graph. I want to make sure that both are on an uptrend. A company making more profit but showing a slowdown in sales or, worse, a decline will lift a red flag. On the other hand, a company with both sales and profits going up will definitely lead to more dividend growth in the future. This is how you can beat the market.

Here’s McDonald’s (MCD) example where sales, profits and dividends are growing while the payout ratio is decreasing (due to a bad year in 2008 where the payout ratio was much higher than previous years).

Sales Growth Requires Competitive Advantage

What’s the best reason why a company’s sales grow? The company has a competitive advantage. It can be a total leadership in its market, new innovative products, better locations, better process, strong branding, etc, etc, etc.

A company without a competitive advantage can’t really push its sales higher over several years. It will rapidly hit the ceiling and will have to cut on their costs to increase its profit. It will eventually hit them as you can’t continue to grow simply by cutting costs.

By selecting a dividend growth stock, you select a company with strong cash flows coming from increasing profits generated from more sales. Sales growth is often linked to a competitive advantage. Aren’t we drawing the picture of a perfect company for any investor by now?

Investing in Companies with Competitive Advantage is the Key in Becoming a Successful Investor

Regardless of your investment strategy, you will be investing for several years. Most investors have money allocated to investments for more than ten years. If you don’t want your face pressed up against your trading screen for the next ten years, you might want to select a more passive investing approach than day trading.

The best way to become a successful investor for the next decade is to find companies with competitive advantage. It is sometimes hard to define what kind of advantage is sustainable or not. This is why I focus on dividend growth stocks to make sure I pick businesses with all the qualities mentioned in this article.

With simple filters like dividend growth, dividend payouts, earnings per share and sales growth, you can easily find strong companies with a competitive advantage.

No need to do extensive research to know if a company is coming with “the next big thing”.

No need to hope for a homerun with your next pick; most of your stocks will be singles or doubles with dividends.

No need to track your portfolio on a daily basis, dividend investing is meant for the long term.

When you think about it, dividend stocks beat the overall market in general simply because they are rewarded by investors for their sustainable business model. A model allowing them to pay dividends for years.

A Word of Caution – Not All Dividend Stocks Were Created Equal

It’s not because a company shows strong dividend metrics that it is automatically a buy. For example, Radio Shack (RSH) was showing strong dividend metrics not so long ago and everything collapsed rapidly since their business model wasn’t a great match for today’s economy.

It is important to design a strong dividend growth model approach before picking anything from your filtered list. Don’t forget there are Dividend Traps to avoid!

1. Analyzing And Investing In Community Banks @ Barel Karsan.

2. Realty Income Corp (O) Dividend Stock Analysis @ DGS.

4. Recent Buy @ Divided Mantra.

5. How to Generate Energy Dividends Despite the Peak Oil Non-Sense @ DGI.

6. Why you need to start investing when you’re young @ Retire by 40.

7. Investing Conflicts? Understand Your Investment vs International Allocation @ The Passive Income Earner.

8.  Why Share Buybacks And Repurchase Plans Aren’t Always Great Ideas @ The Dividend Pig.

9. Should The Government Force Us To Save Money? @ IS.

10. The Summer Road Trip Edition.

Some investors sell in May and go away while others think the current rally can’t continue forever. “The stock market is high enough, there is a correction ahead”. I guess I’m one of those investors who believes strongly that the rally will continue throughout the rest of the year.

As I wrote in my article “Stock Squeeze! Look For All The Money You Can Invest in The Stock Market”, I believe we are in a perfect situation for investors:

• Money is moving from bonds to equity (pressure on the demand for stocks)
• Companies’ profits keep climbing (so you are not paying for a bubble, but for real cash)
• Share buyback programs are becoming very popular (even more pressure on the demand for stocks)
• Dividend yield is higher than the 10 yr bond yield
• Interest rates to stay put (which means it’s easier for company to manage their debts)

These are the reasons why stocks have climbed so high so far. The interesting part is they are all very true and there is no reason why stocks should slow down. While several companies are riding the wave since the beginning of the year, others are still trailing. I’ve picked 6 stocks to be good buys for the upcoming months. Five of them are part of my 2013 Best Dividend Stock portfolio showing an investment return of 19.67% and a dividend yield of 3.05% since the beginning of the year.

#1 Chevron (CVX)

Chevron’s sales growth is very interesting for a mature company operating in a mature business. The #2 player in the world for oil energy shows a very strong dividend record and its business model produces both growth and profitability year after year.

CVX shows a low P/E ratio combined with stable sales and, most importantly, constant dividend growth. If an investor is looking for a relatively safe investment and is looking for a dividend yield over 3%, CVX will quickly fall onto his radar screen. A dividend growth as stable as CVX’s is far from being ignored by dividend investors:

I guess the only reason why the stock hasn’t surged yet is the overall concern about the global economy. It is true that the barrel of oil has been stagnating for the past two years but Chevron continues to increase its dividend. Since the current payout ratio is under 30%, it is safe to think that many good dividend payouts are to come ahead.

#2 Kelloggs (K)

I like well-diversified companies that show stable growth, can you tell? After a reorganization in 2011 which affected profits, Kelloggs seems to be in a great position to meet financial analysts’ expectations in 2013. The purchase of Pringles is performing better than expected. Earnings per share are going up slowly but surely and dividend payouts are following the same path. K is another solid stock to build your core portfolio.

On May 1^st, Kelloggs, kept its membership in the “share buyback group” and announced another $1 Billion share repurchase program. Sales are expected to grow by 7% while EPS should continue increase by 5 to 7% by the end of 2013. The company is also expecting to raise its dividend by 4.5% in the third quarter of 2013.

#3 McDonald’s (MCD)

Being a dividend aristocrat, MCD has been proving to the stock market that it can continue to show constant growth even in mature markets. Their presence in emerging markets combined with the renovation of both their restaurants and their menus were key to their success.

The stock has been trailing behind the index so far this year due to relatively slow sales growth for the past twelve months (see graph). However, MCD recently announced sales up by 2.6% in May compared to previous year. McDonald’s is proud to add various meals to its menus in order to insure growth in a rough global economy.

Their main challenge remains the consumer eating habits slowly switching to healthier food but McDonald’s prime business advantage is definitely their restaurant locations. With a dividend payout ratio under 60% (currently standing at 54%), the company has a lot of room to continue increasing its dividend.

#4 Walmart (WMT)

Walmart’s dividend yield may be relatively low (2.46% as at June 10^th) but their 7 year dividend growth rate of 14.9% tells you will be earning over 3% in dividend yield on your capital soon enough. The stock has been trailing behind most dividend stocks since the beginning of the year and it is still valued at a reasonable price (P/E of 15.06).

The earnings per share, revenues and dividend increases follow accordingly maintaining a more than reasonable payout ratio of a little over 30%

In addition to a healthy business model, Walmart also has a healthy balance sheet. They are still sitting on a lot of cash and this is why WMT will contribute to this stock squeeze: it has recently announced another $15 Billion share buyback program. There is definitely more room for WMT to grow over the upcoming months.

#5 Andrew Peller (ADW.A)

For my two last picks to benefit from the current stock squeeze, I decided to check out the northern side of the border and select two Canadian companies.

Andrew Peller produces, bottles and markets wine in Canada. The best known brands and award winning labels are Peller Estates, Trius, Hillebrand, Thirty Bench, Sandhill, Copper Moon, Calona Vineyards Artists Series and Red Rooster. ADW’s main market is Western Canada and Ontario.

Awards, gains in market share and strong sales were the three characteristics for 2012 at Andrew Peller. The EPS is growing faster than the dividend payout which is always a good thing. A low P/E ratio for a company showing consistent financial metrics is definitely a good indicator.

The stock is showing a year-to-date return of 22% but it is still traded at a P/E ratio of 12.83 which is relatively low. There is definitely room for this company to continue growing… as we continue to drink more wine!

If you are looking for more Canadian stocks, I got a great deal ($50 rebate!) for the Dividend Guy Blog’s Readers to subscribe to The Successful Investor newsletter;

#6 Black Diamond Group (BDI)

Black Diamond Group rents modular structures to provide services and camps for temporary workforces and work structures. Black Diamond also offers a wide variety of oilfield accommodation equipment. Their services go from temporary offices to full-service lodges. Their slogan makes me smile: “We were HERE before HERE was HERE”. Their main market is obviously Western Canada.

Black Diamond focuses on predictable and recurring cash flows from long term projects. The company is showing high speed growth both in terms of sales and profits. It keeps a relatively high dividend growth policy at the same time as ensuring sales growth. BDI is not limited to oil sand exploitation and seeks to grow its business in the USA as well. Their fleet size is continuously increasing but its % utilization remains over 80%.

The company continues to show strong numbers with slower growth in the oil sand industry. If the demand for this product would grow, BDI will be among companies who will benefit the most.

More to Come

As of today, I’m fully invested in the stock market as I strongly believe in my stock squeeze strategy. There is definitely more room for the stock market to continue going up and breaking new records. As long as profits are climbing, there is no need to worry. What do you think about these stock picks? Do you hold any of them?

Disclaimer: I hold shares of CVX, MCD.

Lately, I was looking at my portfolio and noticed something that sucks: I bought 2 stocks right before they dropped on the market. My recent buys of McDonald’s (MCD) and Disney (DIS) were done while their stocks were near their peak and are down by 5-6% each as of this morning. Could it simply be a coincidence? Part of the answer is yes, but there is also another reason why… and this is an investing rookie mistake that I could have easily avoided…

Rookie Mistake #1: Look at the Ex-Dividend Date Before Buying a Stock

I bought MCD on May 28^th at a price of $102.15 (amount converted in Canadian dollars). Two days after, MCD hit its Ex-dividend date. The investor who holds the stock on the Ex-dividend date is the one who will receive the dividend payment. So I did buy MCD almost right before the Ex-Dividend date, this means that I will receive MCD dividend payout shortly. However, once the Ex-dividend date passes, the stock usually drops as the money that was sitting on the bank account is leaving MCD to be distributed. This adds pressure on the stock price to drop for two reasons:

#1 Investors may wait until they cash in a last dividend and then sell the stock. If you were to sell a company right before the Ex-Dividend date, you may want to wait a few more days and cash a few more dollars.

#2 Since there is less money in the company balance sheet the day after the dividend payment is made, the stock technically worth less compared to its value the day before.

Let’s take a look at what happened to the stock over the past 30 days:

Note to myself: wait until the ex-dividend date is passed to buy a stock. Since I’m not dripping MCD, I will receive cash, but my investment return on this particular stock will be shown as negative for a while.

Rookie Mistake #2: Be Blinded by a High Yield Dividend Stock

Most dividend investors select stocks to earn revenues. There is no point of building a dividend growth portfolio if you are not looking for the dividend payout, right? This is why beginner investors tend to look for the highest dividend yield possible thinking they are smart cookies to build a portfolio paying 6% dividend or even more!

If you are part of these investors, I would suggest thinking about this strategy twice: we are in a “near-zero interest rate” environment where it is almost impossible to buy quality bonds paying decent interest rates. So why do you think a company would pay a dividend over 5% in such an environment? If you can’t find a logical explanation for a company paying triple what can be found on the market, this is probably because the dividend sustainability is at stake.

Note: never trust a high yield dividend stocks, ask more questions!

Rookie Mistake #3: Focus on One Industry

Regardless of your investing strategies, you should always look to diversify your portfolio. This is true for dividend investors, ETF coach potato portfolios and even for growth traders. The problem with dividend investing is that you will tend to find the best dividend paying stocks amongst the same industries. If I take the Canadian market as an example; most dividend investors will take on three sectors: Financials (Banks, REITs, and Insurance companies), Resources (oil!) and Telecoms. This puts your portfolio at great risk as if one of these sectors runs into difficulties (there is a slowdown in the mortgage industries, China buys less resources than expected and new mobile competitors may enter the telecom market soon), your whole portfolio is at risk.

For US investors, the temptation would be to fill your portfolio with utilities which are great dividend payers with strong balance sheets. I was recently on a crusade to buy techno stocks as well as they have elevated levels of cash in their bank accounts and a will to increase dividends. This is why I bought Seagate Technologies (STX), Intel (INTC) and Apple (AAPL). I recently sold STX since I considered I had too many techno stocks in my portfolio. While these three companies are not evolving in exactly the same industries, they are all linked together in one way or another. Poor sales of PCs will affect both STX and INTC for example.

Note: Try to diversify your portfolio as much as you can. Your return over time will be more stable and you will likely earn better dividend distributions.

Rookie Mistake #4: Sit on Your Portfolio

Investors making money with their trades become often complacent about their investments and think their stocks will continue to rise forever. Some of them fall in love with companies because of a high return and while the stock stagnates or slowly drops, they look into their brokerage account to show the positive total return of the company from the goods years and find comfort.

The truth may be different; the company you bought 2, 3, 5 years ago could have been a very good investment but it is maybe time to sell it and look for other opportunities. Don’t sit and enjoy the past returns, think about the future of each stock. This is why I’m looking at my holdings quarterly to make sure my portfolio is following my dividend growth model. If a company fails to meet my basic requirements, I consider selling it in the upcoming months. I usually try to find a replacement stock to make both trades the same week.

Note: Building your portfolio is only the beginning, following your stocks and managing your investments is a continuous adventure.

Have You Made Any Rookie Mistakes?

The funny thing about investing is that you can always be susceptible of making a rookie mistake even if you have been trading for several years. I was too busy to make my trades and completely forgot about the ex-dividend date and made that rookie mistake.

Have you made any rookie mistakes with your portfolio recently?

Disclaimer: I’m hold shares of MCD, DIS, INTC, AAPL