Years of doing research, reading academic studies and working on portfolios (including mine) brought me to this set of rules that enables me to simplify my investing process. Principle 4 – A Strong Dividend Triangle Ensures Future Growth. When analysing a dividend stock, there’s no need to compare 25 metrics. When these 3 simple yet effective metrics form a clear triangle, chances are you’ll see future growth! Watch to understand the principle better!
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Verbatim
00:00 Mike Heroux: Hey, fellow investors, this is Mike Heroux from Dividends Stock Rocks. I hope you’re doing well today. We’re already half way in the seven dividend growth investing principle. So today, we’re going to talk about principle number four, which is a strong dividend triangle enters future growth. So, from time to time, I really like financial research and then utter investors investing strategy, and a lot of people think that you need to get something incredibly complex and including 25 metrics to build the perfect filter, and then you get that perfect stock list and you can just pick those, like close your eyes pick those companies, and then you’ll get a strong portfolio. And when I look at that, I’m completely the other way around, what I like about my investing strategy is that it is simple, but effective, and you can learn a lot about it through the dividend triangle. So basically what it is, is that I’m looking at three pillars, at three different metrics.
01:13 MH: More as a form of a trend than a specific number. I wanna see where they’re going, and I’m only looking at three things to get my idea of If I should look deeper in that company or not. So the first one is revenue growth. Obviously, when you invest and that’s for any investors, even though you’re not looking for dividend as an investor, you wanna make sure that you pick companies that has a strong business model, leadership, competitive advantage, regardless if it’s a new product, R&D development, patents, costs, production-wise, strong brands but you want to have companies showing growth vectors. You want to pick up companies that will grow in the future. So when you’re looking at a company like Microsoft, for example, you know that using the cloud, using different alternative services for corporate America, they will be able to grow their business going forward, so you wanna make sure that those companies generate more revenue year after year, so that’s pillar number one.
02:28 MH: The second part of the dividend triangle is obviously earnings growth. So now if you have watched part three of the dividend growth investing principal series, you know that payout ratio is based on earnings and earnings is not the perfect number, because it based on accounting principles which is not really real hard cash in your bank account. The reason why I use earnings is you can play with it for one or two years, using some kind of accounting loss, not saying that they’re being tempered or anything, but just companies will use this type of rules because it gives them an advantage. But, over five, six, seven, 10 years, this is very hard for a company to play around their numbers. So I’ll look at earnings but I look and again, at the trends and I wanna make sure that the more the company grow their revenue, the more money they made out of it so it’s one thing to grow revenues but if your margins are going down or if you’re not making money, then you won’t be able to distribute it, and then you won’t be able to pay out dividend. So second thing, look at earnings.
03:43 MH: And then the third pillar of the dividend triangle is obviously dividend growth. As I mentioned in video number two the focus on dividend growth is the back bone of my investing strategy. It is the most important thing that I consider when I have to make a new investment. A dividend that is increasing year after year, non-stop is a strong statement by management, it tells you that management is confident in the company enough, that it can give you more and more money today. But they also know that next year and the year after, and then in five years down the road, they will be able to keep that promise going and keep increasing their dividend payment on top of having a business that is growing, so grow vectors, more earnings will lead to more dividends.
04:36 MH: Now, it seems to be a bit simplistic, it sounds like too simple to be true, right? But when you think about it, if you’re looking at companies that shows a healthy trend for three years and five years for those three metrics, then you have a very strong starting point to look inside the company. Read quarterly financial statements and get your head around the business model to understand the companies a bit better. But this is my starting point when I wanna make a research, so I’m not necessarily picking all the companies from that list, but this is my starting point.
05:15 MH: Now, keep in mind that revenue will not always increase year after years. You are sometimes going to hit speed bumps along the way. The same thing for earnings. In the end it’s important that if you have a few bad years for revenue or for earnings, the company is still able to increase its payment. If you get that, then you’ll get a strong company anyway. The important part is to look at the trend where it’s going, why it is happening. So sometimes when you look at the trend, I prefer to trend and looking at the annualized growth rate. Because when you see the trend and there’s something going up too fast or down too low then it is, again, an opportunity to investigate a little bit further to understand what happened in the past for that company, and make your head around it and determine if chances are it’s going to happen or not later down the road.
06:12 MH: So it will rarely be a straight line. I hope that you have enjoyed this video. Next one we’re going to talk about stock valuation, this is probably one of the most debated topic among investors as how that you can put a price tag on a stock, how it is sometimes over-valued for one and undervalued for another investor. So we’re gonna talk about this. And until then, stay invested and get this dividend rolling.
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