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(This article originally appeared on The DIV-Net) As an investor who buys individual dividend stocks, I have developed a pretty robust methodology for evaluating the stocks that I include in my portfolio. I know that I am in no way a perfect investor and my process is far from perfect. In fact, I look to invest in index and pension funds in addition to my dividend stocks as a way to round out my portfolio and balance the risk of buying individual stocks. Individual stocks are riskier than index funds because of the diversification factor. However, I still enjoy individual stock selection and have decided to continue with it. The primary reason is that I am comfortable with the four key metrics I use when selecting my stocks!
Before you freak out on me, please note that I don’t only use these four pieces of data when deciding to buy or not buy a dividend stock. However, when examining dividend stocks I believe that these factors are the most important. They help set the tone for the performance of the stocks over the very long term (10 years plus). Not in any particular order, here are the four metrics:
1. At least 10 years of dividend increases
2. A three year dividend growth rate that is greater than 12%
3. An Earnings per share trend that is up, with no more than 2 down years in the past 10 years
4. A debt-to-equity ratio that is less than 50%
I believe that each of these metrics are what really sets a company up for success. The dividend increases is a no brainer – as dividend investors we want the compounding effects of a rising dividend. Add to that a dividend growth rate of 12% and the dividend doubles ever 6 years. If you reinvest your dividends this compound growth is dramatic. Dividends come from earnings so we want a company that is consistently growing their earnings. Finally, debt costs money and cash flow and if it is too high that can mean less for the company to pay out dividends. I want this number as low as possible.
I would love to hear your thoughts on this. If you have other metrics you believe are more important, please use the comments to let me know.
The 3 year dividend growth rate greater than 12% – is that 12 % per year on average, or is it 12% total over the three years
The 3 year dividend growth rate greater than 12% – is that 12 % per year on average, or is it 12% total over the three years?
Very good reading.
2 questions:
Any specific reason for the number 12%?
How many companies fit in to your filter today?
What about payout ratio? You don’t want a company to deplete shareholder value to keep up a dividend payment.
This brings up a good point I’ve been meaning to ask you. If you a buy and hold investor does any of that really matter? If you dealing with Canadian stocks isn’t the only question you need to ask is:
Do I know the company and does it have a DRIP
My Dad has held Bell Canada for over 50 years (as an employee) and many other stocks for many many years. He’s held them through thick and thin. Of course if you dealing with US stocks than it’s a different story as the selection is soo much larger.
I like the 10 year of dividend increases stipulation. Dividend achievers are a must. I’m not a big fan of DRIP plans as I like to have the flexibility to do what I want with my dividend dollars that are owed to me, but I can see why others like the positives that come with a DRIP plan.
Cheers
Using the rule of 72
http://dividendgrowth.blogspot.com/2008/09/rule-of-72.html
at a 12% dividend growth rate, your dividend payment will double in 6 years. In other words if you purchase a stock that yields 2% right now, in 6 years your yield on cost would be 4%.. Six years after that your yield on cost doubles again to 8% and so on..
Most dividend investors are chasing current unreasonably high dividend yields, which often lead to the purchase of securities that subsequently cut their dividends. Instead they should be focusing on dividend growth, and buy hidden gems like some dividend achievers/aristocrats.
Blu,
If I am looking at two companies and their fundamentals meet the above, or similar criteria, I will compare the two payout ratios. If I had to choose I usually choose the company with the lowest payout ratio. In my opinion they are in a better position to grow their business and grow their dividend.
Interesting metrics. If I had used some of this criteria earlier, I would have avoided purchasing some shares that were only able to give out a hefty dividends once. But 10 years of dividends growth is quite strict a criteria..
hmm, i like those 4 tips of yours – makes me want to go out and start investing again 🙂 but i think i better wait a little while longer for the market to settle down.
-jerry
Can you provide the rookie investor your insight into what resources (i.e websites) one can use and where to look in order to quickly determine these metrics?
What is a good website to input these stock screeners? to be able to put in the four metrics listed above and get a list…any help with this would be appreciated.
Colin
Yes, I would like to learn where I could find a list of good dividend paying stocks, too.
Thanks for sharing your criteria with us.
J.
Ditto on the request for a site that allows you to screen for the 4 metrics you listed.
For US listed stocks, I downloaded MSN’s stock screener. It is quite powerful although it doesn’t have EVERY criterion I would like.
For Canadian stocks, I went to a mutual fund that listed all of the dividend “aristocrats” and then used dividendinvestors.ca to look at them one-by-one. I found that the information there isn’t always accurate so you still need to do some investigation.
I used Excel to input a web query to dividendinvestors.ca (the ticker symbols again gleaned from a mutual fund that deals with Canadian dividend achievers/aristocrats) and then populated a spreadsheet with this info.
Then it was pretty simple to create some filters within Excel to identify which stocks met all of the criteria I was interested in.
P.S. I, too, reiterate that dividend payout ratio was a key criterion for me.
I always appreciate a simplified view of how to screen dividend paying stocks.
Is anyone here able to list a few that meet these criteria?
Thanks