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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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  • Dividend Growth - The Stock Selection 46 comments
    Jan 19, 2013 3:56 PM

    My primary objective for investing is to seek income replacement. I want to earn more income from my investments than the income I earned during my working years.

    I believe the best way to achieve that is through Dividend Growth Investing.

    Dividend growth is the critical piece in the puzzle for creating a portfolio that will serve you over the years. ... Please pay attention!

    This is a simple idea, but it is also the single most important idea for long term investors. The reason it is so important is that "dividend growth drives the compounding principle" for individual stocks in a way that is certain and inevitable. It is an authoritative force that compels higher returns regardless of the other factors affecting the stock market.

    Let me repeat that! ... "Dividend growth drives the compounding principle."

    The important point is that an instrument that produces income is valued based on the amount of income it produces. And, the more income it produces, the more it is worth.

    This instablog is going to delve into the selection process for companies that support my objectives.

    In sales, in sports, in investing or anything else in life, it all starts with the basics, the fundamentals. When you understand the basics and fundamentals of an activity, you have something to build on.

    There are times in life where you will face adversity in anything you do. The way you usually get back on track is to go back to the basics and start all over again. My goal is to stick with the basics and minimize the adversity I face moving forward.

    So here's the success formula that never fails:

    High Quality + High Current Yield + High Growth Of Yield = High Total Return.

    This formula never fails. You may fail the formula, but the formula won't fail you.

    Here are the components of High Quality. High quality companies are financially strong and are signaled by low debt, strong cash flow and overall creditworthiness. Financial strength is the key requirement in the stock selection process. Since we are buying ownership in a business, a business is a financial entity. Therefore, if a company doesn't meet my safety ratings, the due diligence process goes no further. It's what I look at first.

    If one were to look at a Value Line Survey, I require a 1 or 2 rating for safety. The VL financial rating must be B+ or better. If you are looking at an S&P rating, it must rate BBB+ or better.

    Financial safety is job #1.

    Once the safety rating is satisfied, then earnings is the next step. Earnings is the oil that keeps the dividend growth machine running. I look to see that earnings have risen at least 7 out of the last 10 years.

    I then look for revenues and cash flows to have increased 7 out of the last 10 years.

    Once this criteria is met, the dividend is next. I want to see the dividend raised in 10 out of the last 10 years. This covers two recessions and I want to insure that my companies were able to continue raising my income regardless of economic conditions.

    At this point you may choose your other criteria such as minimum yield requirement, beta, return on equity, price earnings ratio, payout ratio or any other criteria you deem important. My point is that those fundamentals don't even get looked at until the financial safety, financial rating, earnings, revenue and cash flow requirements are met.

    When all of this is complete, I then apply my Chowder Rule.

    My objective is to grow my portfolio at an 8% total return, compounded annually. I'm not opposed to higher than that, it's just that in order to get the end result, that's what it will take.

    I decided that as a dividend growth investor, I wanted the dividend and the dividend growth to take pressure off of the share price in the total return equation. I can control the dividend I take on, and I can control the companies I add via dividend growth. I have no control over share price. So, it made sense to me to focus on what I could control.

    Since 8% is my total return number, I wanted to buy companies that when you combined the current yield with the 5 year compounded annual growth rate (OTCPK:CAGR), I wanted it to equal 12% or more, giving me a buffer or dividend moat against my total return objective.

    In other words, if the yield is 3% I want a 5 year CAGR of 9%. If the yield is 4%, I want a 5 year CAGR of 8%. This is of course after all other fundamental criteria has been satisfied.

    I was willing to lower the Chowder Rule for utilities, MLP's and REIT's because of the nature of how they conduct business. They all have long term contracts that guarantee revenue. Therefore, I believed the dividend and dividend growth are more reliable. That reliability stills meets my 8% goal.

    Others can adjust it to meet their total return number. The 8% is not written in stone.

    There you have it. That's the process I use when making selections for my dividend growth portfolio.

    These concepts and principles are illustrated in the book, "The Single Best Investment" by Lowell Miller. I highly recommend it.

    In closing, I'll recite the "Warrior Code" as discussed in the book above.

    The hard part in investing is holding, and learning to tolerate the myriad and relentless swings of greed and fear to which an investment holder is inevitably subject. Unless you control these impulses, and we all have them, you won't reach your ultimate goal.

    Holding successfully requires a kind of spartan attitude, a kind of warrior attitude, in which you hold your ground, never retreating, through thick and thin, storms and sun, excitement or depression.

    The warrior attitude says: this is my strategy, it is a good one, it will work; I will not deviate from it no matter what, as long as the position continues to meet the success formula that never fails.

    High Quality + High Current Yield + High Growth Of Yield = High Total Return.

    Dividend growth drives the compounding principle!

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Comments (46)
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  • Chowder thanks. Single best investment is a great primer for DGI. I like the Chowder rule as well. When I looked at the end of the year to the CCC list, I found a few stocks that met these criteria. Some even seemed to be a fantastic value now. How do you finish narrowing down to THE company? I am considering the use of payout ratio. Low payout ratio meaning the company can afford to grow the dividend but then a high payout ratio means they have confidence in their ability to pay the dividend and they are returning more to the investor. Similarly talking myself in circles with other numbers, too. Do you have any factor like profit margin or ROE that help you narrow down to THE stock to pick?
    19 Jan 2013, 04:21 PM Reply Like
  • Author’s reply » tuliptown, I like to compare return on equity and operating margins to break a tie. I may even use beta. I might pick the higher beta now with the intention of buying the lower beta a month or two down the road. The thinking is, the higher beta stock may see price move beyond the qualification for purchase range quicker than the lower beta.


    Basically though, it all depends on the company, the sector and the psychology of the market at the time of decision.
    19 Jan 2013, 04:26 PM Reply Like
  • Good!!


    So, as you know, I recently bought WEC - Wisconsin Energy Company. Current yield is 3.6% with the recently announced dividend raise. The ttm payout ratio is about 46% according to Morningstar. The company announced that:


    "The company’s board also affirmed a policy that calls for Wisconsin Energy to reach a dividend payout ratio of 60 percent of earnings in 2014. The board also adopted a policy that targets a dividend payout ratio that trends to 65 percent to 70 percent of earnings in 2017."


    To get there, I see another 4 years of healthy dividend raises on top of the 13.3% increase just announced.


    Here comes my simpleton question: I could have bought a utility already yielding over 4% but with a lower growth rate.


    Six of one, half dozen of the other - or not?
    19 Jan 2013, 05:10 PM Reply Like
  • Author’s reply » It depends Ron. I'd need to know what your other choices were. I need to determine the safety ratings, where the utility is located, as regulatory issues become a concern, etc.


    I like WEC. I was planning on replacing SCG with WEC if SCG doesn't increase the dividend growth a little more with their next announcement, which is due shortly.


    I hate to miss the upcoming dividend with WEC, but I'm not going to switch for the sake of switching.
    19 Jan 2013, 05:15 PM Reply Like
  • >>High Quality + High Current Yield + High Growth Of Yield = High Total Return.<<




    Very good article that states the fundamentals of selecting dividend growth stocks. And I like your formula. There is a lot that goes into the "High Quality" part. I also use Value Line along with S&P and Morningstar reports to select stocks with strong credit and financial histories. The more I learn and the older I get the more I believe this is the most important part.
    19 Jan 2013, 05:19 PM Reply Like
  • Chowder, I always look forward to your comments on articles and am glad I found the instablog. This is the first time I remember seeing a reference to Lowell Miller's great book. I think it is the best at cementing the details of DGI into the brain. It brought me down the DGI path. That and finding this core group on Seeking Alpha have changed my investing forever.
    19 Jan 2013, 08:05 PM Reply Like
  • Chowder, I am delighted that you are writing instablogs. Next step is writing articles! You can do it! (Percy will bring you a cold one!)


    Every dividend growth investor needs to learn about the Chowder Index, the Chowder Rule, and all the rest of Chowder Wisdom.


    20 Jan 2013, 03:25 PM Reply Like
  • Author’s reply » Robert, I won't be writing any articles. I wrote one last week, but it was declined. I'm not in any mood to go through another learning curve. ... Ha!


    So, I thought I'd write this blog instead where I can say what I want, delete any trolls, and stay on target.


    The only reason I'm writing an instablog anyway is because a lot of people PM me for my thoughts and strategies. Instead of writing the same thing over and over, I can link them to an instablog where I will be placing my thoughts and strategies.


    20 Jan 2013, 04:55 PM Reply Like
  • Look forward to the instablog. I have a watch list comprised of the fish list, sorted by chowder rank, removing companies that I don't understand, or cannot understand their product 20 years in the future. I follow your regular blog and closely watch what you pickup. Keep up the great work.
    20 Jan 2013, 09:38 PM Reply Like
  • "I wrote one last week, but it was declined."


    Several of my articles have been declined. I edit them until I satisfy the SA editors. :-(


    "I thought I'd write this blog instead where I can say what I want, delete any trolls, and stay on target."


    Yes, instablogs have those advantages over articles.


    "Instead of writing the same thing over and over, I can link them to an instablog where I will be placing my thoughts and strategies."


    I agree, and I look forward to your doing more and more of this!


    21 Jan 2013, 11:40 AM Reply Like
  • It can't take much to satisfy them, Chowder's blog is way more credible than some others I've read.


    One guy threw up a trend line on a single chart and that was all the evidence that a rally was over. I guess its a bit confounding as to what SA constitues quality journalism....My bet is the more traffic something gets (ad revenue) the higher chance it gets approved.
    29 Jan 2013, 12:24 PM Reply Like
  • Chowder,
    Stay with the blog! It is more free flowing and a lot quicker apparently. You just won't be paid for your wisdom, unless our gratitude counts.
    20 Jan 2013, 05:10 PM Reply Like
  • Author’s reply » >>> You just won't be paid for your wisdom, unless our gratitude counts. <<<


    Bob, gratitude is more valuable to me than money.


    I believe in the concept of ... that which you share multiplies, that which you withhold diminishes.
    21 Jan 2013, 07:29 AM Reply Like
  • Great article Chowder. I really enjoyed reading it.
    20 Jan 2013, 10:16 PM Reply Like
  • Nice post Chowder. I use your criteria,then apply some TA criteria for a good entry to a position. Thanks
    21 Jan 2013, 07:01 AM Reply Like
  • Author’s reply » Thanks to all for your kind words.
    21 Jan 2013, 07:30 AM Reply Like
  • 553 followers already...that says it all!
    21 Jan 2013, 07:45 AM Reply Like
  • I like the Chowder rule, where is CAGR at on a site like Morningstar?
    21 Jan 2013, 10:45 PM Reply Like
  • Author’s reply » You can get CAGR here:



    And you can get a more detailed one here:



    Top left hand side under U.S.Dividend Champions.
    22 Jan 2013, 07:29 AM Reply Like
  • And here:

    22 Jan 2013, 12:59 PM Reply Like
  • Author’s reply » Robert, I keep forgetting about that page. I have your page where it says, dividends increased by X years, bookmarked. Thanks for sharing.
    22 Jan 2013, 01:35 PM Reply Like
  • Your welcome, Chowder!


    22 Jan 2013, 02:04 PM Reply Like
  • chowder...


    Sorry to be so late for the party. I miss this when it first posted. Great information for us all. Nice to see your stuff in an extended format.


    Hope you appreciate the difference you are making with all you do.


    22 Jan 2013, 01:53 PM Reply Like
  • chowder...I have always appreciated your perspective and insight that has been put forward by your comments throughout a number of articles.
    This was needed and will make anyone who reads it a better investor.
    22 Jan 2013, 02:23 PM Reply Like
  • Nice post Chowder, thanks. I ordered Lowell's book, sounds interesting.
    22 Jan 2013, 08:29 PM Reply Like
  • Chowdr:
    When you say "5_yr CAGR", do you mean that; or 5_yr Dividend Growth Rate? Sorry for a "new to DGI" basic question.
    23 Jan 2013, 04:02 PM Reply Like
  • Author’s reply » DIck, CAGR is the dividend growth rate. It stands for compounded annual growth rate.
    23 Jan 2013, 04:19 PM Reply Like
  • Chowder:
    My "bad." I've always seen CAGR used in reference to a stock's compunded annual growth rate, not it's dividend growth rate.
    23 Jan 2013, 07:22 PM Reply Like
  • Dick-Y,
    As chowder said, CAGR is compounded annual growth rate which is often applied to many metrics - earnings, dividends, revenue, etc.
    23 Jan 2013, 08:07 PM Reply Like
  • Author’s reply » Dick, when I speak of CAGR, I'm referring to the dividend growth rate. When I'm referring to compounded annual rate of total return, (share price plus dividend), I'll use rate of return (ROR).
    23 Jan 2013, 09:58 PM Reply Like
  • Thanks for bearing with me Chowder. I asked my question because there's another strategy called the BMW_Method (on the Motley Fools' boards) that uses CAGR charts, and there it's what you're calling ROR.
    24 Jan 2013, 09:57 AM Reply Like
  • Chowder -
    Love your stuff. I just recently found the SA site. Lots of great ideas and wisdom here. And freely shared.
    24 Jan 2013, 09:12 PM Reply Like
  • I opened a position in Textainer today (TGH). I had looked at it earlier, but had not bought


    I think it meets the formula, but I let someone else do most of the work on it. I really like David Van Knapp's book "Top Forty Dividend Stocks for 2013"


    A title like that would generally be off-putting to me :), but I like this book and using the information to help make this decision will pay the price and more
    24 Jan 2013, 09:28 PM Reply Like
  • Interesting stock. I think the next several years with the amazing growth in the energy sector will benefit the container companies more so then the rails. Is TGH best of breed in the container business?
    24 Jan 2013, 10:26 PM Reply Like
  • I don't know if it is best of breed. I guess that depends on what one is looking for. TGH pays a 4.5% dividend (lower than TAL or BOX), but I selected it for my portfolio, in part because it has a higher 3 year dividend growth rate and a lower payout ratio than those other two divvy payers in the container area.
    24 Jan 2013, 10:36 PM Reply Like
  • I saw that, appears the payout ratio is steady below 50 and dividend increases are substantial. Thanks for bringing this stock to my attention.


    I think that with the need for more transportation of oil, nat gas etc. that companies like TGH will benefit.
    24 Jan 2013, 11:05 PM Reply Like
  • I am glad that you think it is good, but remember that I am a rank amateur and factor that into how you weigh my opinion / selection :)


    Textainer is primarily a shipping container company, and I am not sure how much they have to do with shipping oil and gas.


    There is another company, traded in Singapore, Technics Oil and Gas (TGH: Singapore). That is not the one I bought. I bought TGH - Textainer Group Holdings Limited.
    25 Jan 2013, 09:24 AM Reply Like
  • Chowder,


    Limbaugh has his Ditto-heads, I am now officially a Chowder-head. Thank you for all your wonderful comments, and now your awesome blogs. I have been using your ideas to build my own portfolio, and I'm sure I will have as much success as you. Thanks for all the great lessons.
    26 Jan 2013, 06:39 PM Reply Like
  • Ditto. HA!
    27 Jan 2013, 11:15 AM Reply Like
  • Chowder,
    Thank you for the blog! I just added you to FOLLOWING.
    On discussion with Robert:
    One advantage of SA blog to compare with SA article is the possibility to update the blog (I use it a lot).
    27 Jan 2013, 12:48 AM Reply Like
  • Please allow me to also express my thanks for this Instablog. As a newbie I am finding myself "addicted" to SA, especially to the articles and comments of a few truly talented individuals who thankfully share their wisdom and experience. With a 5 year horizon for converting our portfolio to one which produces income, I feel I am gaining the knowledge to do that successfully and I thank you for sharing your methods.
    28 Jan 2013, 04:13 AM Reply Like
  • Author’s reply » Welcome aboard mocha. I'm glad I could help.
    28 Jan 2013, 07:18 AM Reply Like
  • Chowder, a fantastic, enlightening and informative article.


    Forgive me if I may have missed this in an earlier post: when researching companies to determine if they meet your 12% rule, where do you go? FinViz? FAST Graphs? Robert Allan Schwartz's site? David Fish's CCC list?


    This would be most helpful, and I thank you in advance.


    18 Feb 2013, 05:02 AM Reply Like
  • Author’s reply » Guitar Man,


    For a quick look see, I go here:



    I'll confirm later in my DD process via the CCC list.


    I use F.A.S.T. Graphs for valuations, but keep in mind their dividend growth rates are rounded off. I use David Fish for specifics.
    18 Feb 2013, 07:40 AM Reply Like
  • Chowder:
    I apologize being off-topic. I love the DGI method of investing, but do you include in your Portfolio Bonds and Cash ? Does DGI apply only to the Equity portion of the Portfolio ? If you use DGI, do you still use 100-Age or maybe 120-Age would be more reasonable, to figure your Equity% ? How do you do it ?
    Thank you.
    4 Apr 2013, 04:31 AM Reply Like
  • Author’s reply » Project $3 Million is an equity only portfolio at this time. In my own personal portfolio, I do hold some Muni Bond CEF's in my taxable account for their tax friendly status. They represent about 5% of the total portfolio value.


    I consider utilities to be bond like in nature. I invest in the more financially sound utilities and they are as near to safety as a bond is, as far as protecting principal, but they increase their dividends annually. I own 8 utility companies and that represents about 15% of the total portfolio value.


    I don't stick to a certain percentage in the portfolio with regard to sectors. If you've read my instablog on Core Positions, you'd see that my core positions are companies that sell a product or service we must use regardless of economic conditions. You can be unemployed and you'd still have to find a way to purchase those products. My core positions make up most of my portfolio.


    With that in mind, there are sectors I have little to no exposure in. Metals, Industrials, Technology, Recreation and Financial are some examples.


    I go where the safety of the dividend seems imminent. I look at GIS for example and they have paid a dividend for over 100 years, and in that time, they have never lowered it. They may have periods where they didn't increase it, but they never lowered it. That dividend is as safe as any bond yield. I can say the same thing for PG, KO and many other consumer companies.


    However, if one needs a little more peace of mind, I'd say expose yourself to as much bond value as it takes to provide that peace of mind. It doesn't matter the percentage, it matters your frame of mind.
    4 Apr 2013, 08:55 AM Reply Like
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