Dividend Growth Investing
Disclaimer: The following is meant for educational purpose only and not meant to be investment advice.
Business rules help guide investing during the growth phase:
There are a lot of rules that have been developed on many of the dividend growth investment forums. These are the rules that aligned with my investment goals when first selecting companies to invest.
- S&P IQ rating of B+ or Better (Value line safety 1 or 2/Morningstar BBB+ or better)
- Earnings have risen 7 out of last 10 years
- Revenues increased 7 out of last 10 years
- Cash flows increased 7 out of last 10 years
- Dividend raised in 10 out of last 10 years
- How did the company dividend perform over 2005 thru 2009
- Dividend + Dividend Growth rate is greater that 12% except for Utilities which is greater than 8%
- On the U.S.Companies with 25+ Straight Years Higher Dividends list as a champion or contender
- At least 50% of my investments will be in Defensive with the remaining 50% will be somewhat even between Cyclical and Sensitive
- Equites belong to sectors that are aligned and proportioned to three main investment areas:
- Defensive - 50% of portfolio
- Consumer Staples
- Healthcare
- Telecommunication
- Utilities
- Cyclical - 25% of portfolio
- Consumer Discretionary
- Financials
- Materials
- REITs
- Sensitive - 25% of portfolio
- Energy
- Industrials
- Information Technology
- Defensive - 50% of portfolio
- All cash in the accounts gets invested asap, during earning season investment dollars can be directed to companies that beat on earnings and revenue while reaffirming or raising guidance. (Invest in the strong)
- All holdings are setup to reinvest the dividend back into the holding (DRIP) while cash contributions are still being made to the account. There are a few exceptions that are situational.
- Holdings can live in multiple account types, however the investment is summarized and treated as one on the tracking sheet.
- The tracking sheet is used to monitor:
- How much dividend income the portfolio generates per month and per year.
- How much did the portfolio income grow thru increases in the dividend.
- Share count and the dividend yield on cost for each holding and entire portfolio
- Core holding company. A core holding is a company that based on the business, products, etc.. have little to no plans to sell the position When in doubt, cash is used to build share count
- Supporting company. A company that has potential to be a core holding that has a good dividend with a high dividend growth rate
- Growth Plus Dividend company. A company that has the expectation of stock price appreciation as well a dividend growth
- I track my investment dollars in terms of cost basis not market valuations. (You can use either however since I am interested in share count I decided to go with cost basis)
- Core holding and performing supporting companies I invest to a full size position dollar amount.
- Remaining holdings are invested to a half size position dollar amount
- Once all the investments are at the position size I raise the dollar amount for a full position
- Each year I set an investment theme.
Example: This year was next stock up that was lower than the position size sorted by dividend yield with the higher dividend yield first.
Also: During earning season next man up can be passed over in favor of positions that need investments where the company is beats on earning and revenue while raising guiance. - Keep a couple of stocks on a watch list in the event I need to replace something
Example: Right now I have two in the sensitive category since I am under 25% right now - Freezing the dividend is ok as long as the freeze is justified and understood
Example: Buying another company - Re-evaluate business plan when getting closer to life transition
Example: Approaching retirement time, move positions to primary defensive to protect income stream. - Dividend reduction based on the holdings performance will cause the holding to be fully re-evaluated including a potential liquidation of shares
- Eliminating the dividend will cause the equity to be evaluated to be sold and the funds allocated elsewhere
- “The Single Best Investment: Creating Wealth with Dividend Growth” by Lowell Miller
- Seeking Alpha Website. http://www.seekingalpha.com Follow articles by: Chowder, Mike Nadel, Chuck Carnevale, FerdiS, Valuentum, David Van Knapp, and the late David Fish (Work assumed by Justin Law)
- I use the average fair market value of three different sources to get the fair market value range. I have a subscription and use www.moringstar.com. Maybe cancel this since the brokerage firm is now offering morningstar but dropped the S&P IQ Reports I had been using Morning star, Trefis, and S&P reporting to get an average fair market value of an equity I used the average fair market value to help decide last year where new money should be invested
- I am evaluating looking at a subscription to Valuentum or value line to replace the S&P reports
- U.S. Dividend Champions list: http://www.dripinvesting.org/Tools/Tools.asp
- The tracking google sheet I use: http://www.twoinvesting.com/dividend-stock-portfolio-spreadsheet-on-google-sheets I have made some additions to help with my research based on the investment methods above as well as automate things like sector alignment and investment area
- Tool to compare dividend growth rate with and without re-investing dividend: https://tools.mhinvest.com/mhichart
The stocks listed are not recommendations.
Check out "U.S.Companies with 25+ Straight Years Higher Dividends” list on http://drip.investing.org to select the companies that are right for you.
Defensive
- Utilities - Solid and consistent dividend payments especially in regulatory friendly regions. Lots of options in the space including: Dominion Energy, Southern Company, WEC Energy Group, etc..
- Telecommunication - I consider AT&T and Verizon in the same category as Utilities. In recessionary times people will continue to need the cell phones just as they need to pay the power bill.
- Consumer Staples - Wide variety to choose in this category. These are product sets that are still mostly consumed in recessionary times such as Colgate-Palmolive, General Mills, Coca-Cola, Pepsi, Procter & Gamble, etc..
- Healthcare - Category is wide however between the medical device makers, pharmaceuticals, and medical consumables to select from. I prefer to look at device and consumables makers such as Johnson and Johnson, Becton Dickinson, Abbott Lab, CVS, etc.. Consistency is the key for me therefore many of the drug stocks are off the table.
- Consumer Discretionary - Retail segments that consume the discretionary consumer dollar. During recessionary times these companies could see less consumer engagement. These include: McDonalds, Walmart, Home Depot, Starbucks, etc..
- Financials - This is a sector I stay mostly away from due to the numerous financial crisis over the part 10+ years. Most stability in this sector comes from the regional banks as well as wealth management companies. No specific recommendations.
- REITs - Being a landlord with out the hassle. There are several good equities in this space depending on the type of real estate you prefer. My favorite in this space is Realty Income Corp. The prospectus states management is committed to the dividend and dividend growth.
- Energy - Energy drives the economy however it also rides the pricing of energy markets like oil. Not too much exposure in this area unless the company is number 1 or 2 in its business. I do not invest in MLP energy stocks due to tax consequences.
- Industrials - These are the foundational companies that are behind the scenes of the economy like: Caterpillar, 3M, Union Pacific, Cummins, etc.. Companies in this sector will have ups and downs. Look for these when the sector or company is out of favor.
- Information Technologies - I stay away from this sector for the most part with the exception at looking at companies like Visa, Mastercard, AMEX, ADP, etc.. While in the IT category these are leveraging technology but not a technology provider like Apple, Microsoft, IBM, etc..