When you are about to invest, I believe the very first step is to determine your investing strategy. Your methodology should include considerations such as your risk tolerance, investing goal(s) and time horizon. Once this part is settled, you will get into determining which kinds of companies you want to hold in your portfolio. This will be the basis for you to start building a stock list. The stock list is your garden where you will pick and choose the best ingredients to make your portfolio recipe. As is the case when you cook, putting too much of a single ingredient will not make your meal better, the same rationale applies on your portfolio. Today, we will look at how you can build a stock list and pick the best ingredients from itso your dish will be delightful!
Why Should You Build a Stock List?
The idea of building a stock list is to set the ground rules for your stock selection process. The list helps you to focus on a small number of companies. In other words, the more time you spend building your list, the easier your stock picking activity will become. However, there is a long road between pulling out a list and getting down to a manageable number of companies.
Between the U.S. and Canadian stock markets, there are roughly 20,823 companies. If you select companies paying dividends (0.01% yield), you drop the list to 7,195 companies (source Ycharts). This is still definitely too many.
Because you don’t have the time to follow all the companies in your garden and probably don’t have enough money to buy shares of each of them, you need to select a few picks from your stock list. Hence, the importance of building a very strong stock list. Building a stock list including 1000 companies is not of any help. Then you would have to look at each individual company to see if they would be a good fit in your portfolio.
There are Existing Stock Lists for You to Pick from
If you don’t have the time or the resources to use a good stock filter, you can always pick among lists made for you. For dividend growth investors, there are already a good number of great resources you can find for free across the internet. Here’s a list of my favorite:
- Dividend Kings – 18 companies that have increased their dividend payment for over 50 consecutive years.
- Dividend Aristocrats – 50 companies that have increased their dividend payment for over 25 consecutive years.
- Dividend Champions – 106 companies that have increased their dividend payment for over 25 years, but are not necessarily part of the S&P 500 (aristocrats are).
- David Fish lists of Dividend Champions, Contenders and Challengers (basically all the list of companies that have been using the path of dividend growth)
- Canadian Dividend All-Star – a compendium of the best Canadian dividend paying companies updated monthly by Dividend Growth Investing & Retirement
These are among the best free resources I’ve found so far on the internet. Each list is updated and the information is accurate. This could save you lots of time when you are looking for a new addition to your portfolio.
For those who are like me, you probably prefer build your own stock list with personalized metrics. What I don’t like about the existing lists is that they focus on past dividend growth history, but they don’t do much to tell me if the company will continue to perform in the future. This is why I build my own stock list.
Which Criteria Should You Use for Your Stock List?
Each time I want to make a purchase, I follow the 7 Dividend Growth Investing Principles. I don’t only look for companies growing their dividend, but for companies that will continue to grow and perform in the future. For me, the dividend growth is as important as the stock value growth. This is why I build my own list. Here are the basic criteria I use to build my list:
- Dividend Yield over 2% and under 6%
- 5 Year Revenue Growth positive
- 5 Year EPS Growth positive
- 5 Year Dividend Growth positive
- Payout Ratio over 0% and under 85%
- Cash Payout Ratio over 0% and under 85%
These metrics help me narrow down, below 400, the number of companies to look through. It is still a lot of companies, but I can apply additional filters to narrow down my search (thx to Excel!). The idea of using these metrics is to make sure the company is not only growing its dividend payment, but also grow two other very important metrics for its future: revenues and earnings.
My latest stock list has been pulled out in October. You can download it here:
I will use this list to build my top 2017 dividend stock eBook. In fact, the selection is almost all done, it’s now just a matter of analyzing each company and build my report. What do you think of this list? Do you use any other stock lists to build your portfolio? Let me know and I’ll add it to the article.