Selecting Good Dividend Growth Investments

  • Now that I hopefully have convinced you that dividends are a great strategy (if not, go back out a do some research – Google terms such as ‘Dividend Growth’ and ‘David Dreman’) then you are now ready to start investing in dividend paying stocks. I will present two ways to do this, although there are many more that you may find out there.
  • #1: You can easily go out and find some good low-cost mutual funds and ETFs that focus on dividend growth such as the Vanguard Dividend Growth Fund or the PowerShares HighYield Dividend Achiever Portfolio. These will provide you with the power of growing dividends in an easy to use package.
  • #2: If you are more adventurous and enjoy doing analysis out your ying yang, then choosing individual stocks are for you. This takes some time and know-how, but with enough practice you anyone can do it. Here are the things I look for when doing fundamental analysis – you need to develop your own methods.
  • The #1 thing I look for of course is a steady increase in the dividend payout – the more consistent and higher the better. I will go with a stock with a low dividend yield if it has been consistently and aggressively growing that dividend. If this metric is not good, then I stop and go on to the next company.
  • Rate of Return: In all aspects of investment analysis, we are looking to project a good future rate of return. We do this by looking at past growth rates for things like revenue and earnings per share. I deem a rate of return to be good when it looks better than many of the other stocks in the particular industry and it is consistent year often year for many years.
  • Revenue: Basically, you want to see the revenue going up ever year for many years. At what rate of return you want to see is up to you to you. The more consistent it is the easier it will be for you to estimate what the revenue line will look like in the next five years.
  • Earnings per Share: Similar to the revenue examination, you want to see the EPS trending up consistently, year after year, for a long period of time. Again, the more consistent it is the easier it will be for you to estimate what the EPS line will look like in the next five years.
  • Price: Is the recent P/E ratio lower than it historically has been? This is just one metric you can use to determine if the stock is cheap or expensive. Another metric you can look at is the dividend yield – is the dividend yield higher than it historically has been – if so the price per share may be below historical prices.
  • There are many other ways to do fundamental analysis on a stock. Scour the web and find metrics and methodologies that suit your needs. One tool I use is the Stock Selection Guide by Canadian Shareowners Association (http://www.shareowner.com). They have a great piece of software that allows you to run the numbers to see where the company is in terms of historical data and project out to the future to get a buy range.
  • Remember, stock analysis is totally subjective and my interpretation of the data may be very different from yours.
  • For a list of tools and sites to conduct research, please check out the links under Tools on the left hand side.





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