My 7 Principles For Dividend Growth Investing

Includes: CLF, KO, MCD, PG
by: Eddie Herring

Introduction: Missing The Curves

If you've ever followed baseball, you know that curve balls can trick even an excellent batter. The market has a nasty habit of throwing curves. Right when you've done your analysis, performed all your calculations, checked all your charts, and you know it's about to zig, the market decides to zag.

That's what, in my opinion, is so great about dividend growth investing. You don't have to be that concerned about the market. You want to observe it and be aware of what's going on, but if you have fundamental principles guiding you, then the fact that the market is throwing curve balls doesn't bother you.

It's a Business

Many companies will have mission statements, a vision statement, business plans, goals, and action plans to help reach those goals. The company I spent 36 years with had all of these. We had regular meetings to review our progress on reaching certain goals, conducted business plan reviews to verify we were meeting targets, operating within budget, and when making decisions would ask, "does that move us closer to our goals, and is it in compliance with the business plan?" I believe it's a good idea for the individual investor to have these as well. You can find good information for developing these here on Seeking Alpha. David Van Knapp has an excellent one here.

Separate of mission statements, goals, and plans though, I believe a person needs certain principles that function as guides for their decisions and actions. During my career, I was in various management positions and over that time developed certain guiding principles for functioning as a manager. Some of these, I was taught by mentors, and some I had to learn the hard way. Those learned the hard way tend to stick with you. I refer to them as principles, but they could just as easily be referred to as axioms, maxims, or rules. I've taken these management principles and adapted them to guide my own dividend growth investing.

The 7 Principles

Although I've numbered them, as I list them here, they are in no particular order of importance. I will state them as I used them as a manager and then explain how I use them in dividend growth investing.

1. Surround Yourself With Good People. I believe the secret to being a good manager is to surround oneself with good people, establish the requirements and expectations, and then get out of the way and let them do their job. Don't micro-manage! As a dividend growth investor, I apply that to mean surround yourself with good companies, establish what your long-term expectations are, and then give them freedom to do what you expected when you invested in them. By good, I mean consistent dividend growth companies such as Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), and McDonald's (NYSE:MCD). Don't micro-manage them. Worrying about each daily movement will only create stress for you and it won't affect their movement at all. Giving them freedom means don't panic at the first drop below your entry or set stops that will be hit at the first downward spike in the market. Personally, I don't use stops on my dividend growth holdings. You'll need to decide if they're for you.

2. It's All About Relationships: The two types of relationships in my former work I was concerned with were relationships with people and the relationships of the business to other factors or entities. I negotiated contracts so I needed to know the relationship of what I was buying to the companies with whom I was negotiating, such as manufacturer or distributor, and to the industry. For dividend growth investing, it's understanding the relationship of the companies in which you wish to invest to the market, to their competitors, and to economical factors affecting them or their industry. For example, I'll use beta which is a measure of volatility of individual companies as they relate to the market as a whole. A company like Cliffs Natural Resources (NYSE:CLF), which has an attractive dividend yield well over 5%, has a beta of 2.4, which means in relation to the market, it's going to move a lot. As a dividend growth investor, I prefer low beta so Cliffs was not for me. There are other relationships to consider as well. If that natural gas company in which you're considering investing has a preponderance of their facilities in coastal areas, do they have a relationship to hurricanes? Does that foreign company you're considering have a significant enough presence in a country that a revolution or even nationalization could impact it, as happened recently in Argentina? These may be extreme examples, but the point is to think about relationships that need to be taken into consideration before investing.

In regard to relationships to people, having a network of contacts was essential, whether it be with other managers, customers, or companies with whom I was conducting business. Developing a good list of contacts can greatly improve the "knowledge base" with which to improve your overall investing skills. By studying the articles here on Seeking Alpha, you can learn who has the understanding of and experience with dividend growth investing. When you find someone who you think is very knowledgeable, and has a similar investing philosophy, check to see who they're following. Smart people generally follow even smarter people, or people more knowledgeable in specific areas. Think of it as your own personal investment network in the cloud.

3. Know When To Say No: I used to have difficulty saying no to taking on additional duties or projects with its associated stress and work hours. That's one of those things I learned the hard way. For dividend growth investing, one must learn to say no to investments that don't meet your specific requirements, emotional investments, or snap judgments such as investing because that unsolicited email said it's a sure thing but you have to hurry. In my previous article, I explained why I said no to Mercury General Corporation (NYSE:MCY) even though it is a dividend champion. It didn't meet my specific requirements. Determine the number of companies that you can safely manage in your portfolio, especially considering position size, and stick to it.

4. Be Ready When Opportunity Knocks: Opportunity often presents itself at unexpected times. It pays to be prepared. For example, have a watch (shopping) list of companies that you've reviewed and determined you would like to own. If the market decides to put them on sale at a valuation that meets your criteria, be ready to become an owner by having already performed a thorough analysis. If nothing has changed to your analysis, take advantage of the opportunity.

5. Seek Dependability: Over the years as a manager, I've had people who were extremely talented but erratic, those that were there to just "make eight" and those that were there every day giving good solid performance. Give me the solid dependable performers any day. I try to think of selecting my companies to invest in as hiring employees. After all, they'll be working for me. I want companies who will give good solid performance and grow their dividends year after year, companies who will be dependable employees. Before hiring an employee I would look at resumes and past performance reviews. You can check the "dividend performance reviews" of many companies at Robert Allan Schwartz's website here. The latest hot fad stock may be what everyone is talking about, but that doesn't mean you want to own it as a dividend growth investor. Those hot stocks can turn freezing cold twice as fast. I liked fables and stories as a child, and to the best of my recollection, I don't remember that hare ever beating that tortoise.

6. Knowledge Is Power: Obtaining as much information as I could about companies with whom I was negotiating, whether it be their sales or manufacturing schedules or current workloads, was imperative. The more I knew the higher the probability I would get a better deal. The same is true with your dividend growth investing. There are no guarantees in investing, so as an individual investor, knowledge is even more important if you're at the stage where you will be dependent upon the funds from your investments. To increase your knowledge, make a commitment to continuing education. The internet is a great place for continuing education at no cost. Then use that knowledge gained to increase your knowledge of the companies you wish to own. For example, I believe it's a wise use of time to review financial statements of companies. But if you aren't sure how to read them, you can do online study to gain a better understanding. An example of a place to start is here. You can also get a great education here on Seeking Alpha, not only from reading articles, but especially from reading comments. The intent of continual education is to make you an overall better investor and to increase the number of tools in your investing tool bag.

7. Do The Right Thing: At work, this took in things such as ethics, professional decision making, and personal conduct. I won't invest in companies in which I think the management team has ethical issues. I've applied this to some of the too-big-to-fail financial firms because I think they intentionally mislead their shareholders, but that's just a personal opinion. Some people won't invest in tobacco companies, gun companies, or other companies that don't align with their personal values. Each of us has to decide what's important to us and make our own personal choices in these areas and the companies in which we're willing to invest. Call it the "First Amendment" to your own Investment Constitution.


These seven principles were simply things from my former career that I've adopted and applied to my investing to help guide me. They may not be what you want to use to guide you. What I'm attempting to convey is that one needs to establish their own individual guiding principles and let them be the foundation on which their investments reside. If you have that solid foundation, then it won't matter if the market throws a fast ball, breaking ball, or knuckle ball, you'll rest easy and sleep well at night. I like sleeping well. Speaking of resting easy, it may be time for a nice nap.

Disclosure: I am long KO, PG, MCD.

Additional disclosure: I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.