A Disciplined Approach to Dividend Stocks

Those that have read this space for any period of time are well aware of my enthusiasm for using dividend growth stocks as a vehicle for building long-term wealth and income. However, with that said, a successful investor must do more than just buy stocks that pay a growing dividend, or more than focus on a single metric such as dividend yield. Not all dividend stocks are created equal – there is a discipline to selecting good dividend growth stocks.

Understand Your Goal

What is your portfolio trying to accomplish? As odd is it may seem, many investors never define this and their overall goal. Are you buying stocks like First Industrial Realty Trust, Inc (FR) with a 22% yield, Capstead Mortgage Corporation (CMO) with a 17% yield, Annaly Capital Management, Inc. (NLY) with a 16% yield or Apollo Investment Corp. (AINV) with a 12% yield? If your goal is short-term income these might work, and then again they might not.

Before buying buying any stock you should write down your investing goal and determine if purchasing that stock will bring you closer to your goal or take you further away. My goal is to generate an ever-increasing income stream from dividends. Thus, I will sacrifice some current income in favor of future growth and income stability.

Understand and Measure the Risk

No stock is 100% safe. Each stock has its own set of risks that need to be considered. The stocks listed above are considered high risk. In exchange for above average current income, you may encounter above average dividend cuts and/or loss of capital.

Gauging the relative risk of one stock compared to another is important when deciding which stock to buy or how much to weight a stock within your portfolio. I prefer lower risk stocks such as Johnson & Johnson (JNJ) [Analysis], Procter & Gamble Co. (PG) [Analysis]and Wal-Mart Stores, Inc. (WMT) [Analysis].

A Disciplined Approach

For me and my income portfolio, I have have chosen to follow a conservative and disciplined approach. This means I will seek out dividend stocks with a proven track record and good future prospects. These stocks will have a long history (10 or more years) of consecutive dividend increases, low debt, low free cash flow payout and excellent other dividend metrics. In addition, I will follow time proven valuation techniques to select an entry point that will provide a good value.

Stay The Course

There is always a temptation to stray from a disciplined approach of selecting good dividend stocks. Often I receive questions like, ‘AT&T Inc. (T) is making a fortune off the iPhone [Apple (AAPL)], why aren’t you buying it?’ or ‘Kraft Foods Inc. (KFT) is a great consumer staple, why aren’t you buying it?’ The short answer is that neither currently can pass the entry exam to gain access to my income portfolio.

It is easy to become caught up with the current hot stock that everyone loves. The key to success is to buy before everyone else falls in love with it. Selecting good dividend growth stocks is not difficult, being disciplined enough to do it is difficult for many investors.

Full Disclosure: Long JNJ, PG, WMT. See a list of all my income holdings here.

Comments

[notsosmart:]

be very aware of fake name brands bought on the net.

Nov 04 08:01 PM

[OneRichOne:]

I have owned NLY for 5 years now and the dividend has always been there and growing. The stock has grown in value since my purchase at $14.05. I do agree, one must be careful, bank stocks took a huge hit at the end of 2008 as did some mortgage company stocks.

Nov 05 04:13 AM

[geohjr:]

Great article. I couldn't agree more. I've owned NLY, Canadian Royalities and the like; but always on pins and needles looking to take a profit to buy better divy players. The ones you recommend here.

Nov 05 09:32 AM

[daphne does...:]

interesting, but noticed that both JNJ and PG have extremely aggressive accounting practices--in the case of PG:

AGR® Score
AUDIT INTEGRITY
Procter & Gamble Co (The) is currently rated as having Very Aggressive Accounting & Governance Risk (AGR®), receiving an AGR Score of 2 percentile among the approximately 8,000 companies in North America rated by Audit Integrity, indicating higher accounting and governance risk than 98% of the other companies.
0000000000000000
doesn't sound very disciplined to me. as for WMT, i wouldn't own it on moral grounds.

Nov 05 10:44 AM

[surfgeezer:]

Could not agree more, however I do believe the dollar will weaken more against some currencies. I do know currency risk may be a variable you may not want to get into, but for me it is a positive leverage point and is a good way to augment dividends.

Nov 05 07:35 PM

[Old Trader:]

surfgeezer,

I totally agree, and it was definitely a consideration when I first got into Canroys. I look at the currency aspect as the "frosting on the cake".


On Nov 05 07:35 PM surfgeezer wrote:

> Could not agree more, however I do believe the dollar will weaken
> more against some currencies. I do know currency risk may be a variable
> you may not want to get into, but for me it is a positive leverage
> point and is a good way to augment dividends.

Nov 05 09:11 PM

[jasomir:]

when in doubt, get out.
too good to br true, check the long-term view.
hold on when it goes for a fall?
in one basket don't have it all.

Nov 06 11:52 AM

[EconoMike:]

Daphne, what is it about Walmart that you consider to be immoral? Personally, I think any company that comes along and sells things cheaper has done consumers a great service! Walmart has effectively raised the standard of living for people all across the country.


On Nov 05 10:44 AM daphne doesn't believe wrote:

> interesting, but noticed that both JNJ and PG have extremely aggressive
> accounting practices--in the case of PG:
>
> AGR® Score
> AUDIT INTEGRITY
> Procter & Gamble Co (The) is currently rated as having Very Aggressive
> Accounting & Governance Risk (AGR®), receiving an AGR Score of
> 2 percentile among the approximately 8,000 companies in North America
> rated by Audit Integrity, indicating higher accounting and governance
> risk than 98% of the other companies.
> 0000000000000000
> doesn't sound very disciplined to me. as for WMT, i wouldn't own
> it on moral grounds.

Nov 07 09:38 PM

[cranmer:]

T MO BP AFL CLX MCD BMY my dividend plays

Nov 10 05:27 PM