I've been giving a lot of thought lately to the "art" of picking dividend growth stocks for a portfolio. Getting those thoughts on paper has been a little harder than I thought it would be. But, having given it a couple of shots, I think that perhaps I have arrived at a place where I can bring a little clarity to the topic hand.
Now the kind of stocks that I like, have a track record of paying dividends, they raise those dividends every year, they have a low payout ratio (dividends to earnings), and those dividends must be sustainable. Simple and straight forward stuff, here.
That being said, I began to think about an analogy. While I was driving down the road, it came to me. Picking dividend growth stocks is a lot like picking a spouse.
Now, I have to admit that I haven't exactly been a great spouse picker as I've been down that road a time or two. However, the current spouse has been in my portfolio for a little over 25 years now. She has delivered fantastic dividends over those 25 years (3 great kids), she has protected and raised those dividends into fantastic adults, she has sustained those dividends, and best of all, she has a low payout ratio (relative to the other two spouses, this spouse is definitely "low maintenence.")
That being said, I guess the next question should be, "Well, how do I find a good divdend growth stock?" Well, just like when you're looking for a spouse, you start off with developing a criteria list. In a quiet time, while you are alone, sipping an ice cold adult beverage on the back deck, you ask yourself some questions.
Now, you might find yourself in this situation after one of your stocks has gone and stomped on your heart. It might be after that high octane, life of the party stock left you for another portfolio. Or it might be that the stock next door turned out to be a floozie in disguise. Whatever the case, it's time to start all over. So now, here you sit, broken hearted and asking yourself "how do I really find a stock that I can build a relationship with?
1. Do you want to have a stock you can live with forever or just for a one night stand?
If you are really looking to find a dividend growth stock, then you are going to be thinking about a long term relationship. If you're looking for a one night stand, you might want to try growth stocks, options, or something totally different.
Now, I understand that "forever" doesn't always work out. Sometimes, things happen and you have to part company for reasons beyond your control. There are a lot of things that a company can do to you that just can't be undone.
Cutting a dividend is one of them. There just isn't any excuse for that. Once they violate that rule, it takes a long time (5 years for me) of new dividends to rebuild my trust in that stock and being willing to reestablish my relationship with them again. (Regular dividends, increasing dividends, low payout ratio, sustainable dividends)
2. Do you want to love a company as much as it loves you?
A company shows its love in the form of increasing dividends; doing that year after year. It shows you that it loves you by being good stewards of the income it produces. It shows you it loves you by increasing share holder value.
That stock needs great management. It needs great products and services. It needs to be a leader in its category. It needs to be selling for a reasonable cost relative to its earnings power. It needs to show you the money. (Fundamentals)
3. Are you looking for "eye candy" or a stock you can count on?
Do you really want that flashy stock that everybody else wants to have? Do you like having other people leer at your stock? You know the one with the good looks, the slick packaging, the "head turner" stock? Or do you want a company that maybe people overlook because it might be seen as a little shy and demure? But is it a stock that you can count on whenver the market turns south?
You know, a stock that's not to flashy. Attractive to be sure, but maybe other people pass up because this stock is more substance than flash? Do you want a stock that delivers the goods year after year, time after time or do you want that "rocket" stock?
4. Do you want a "high maintenence" stock or a "low maintence" stock?
Do you want to own a stock that every day when you get home you have to check and find out what it did today? Is your stock up today or is it down? Did your stock get some bad news that devestated it? Did it get good news and now when you get home you find your stock is "higher than a kite?"
Or, do you want a stock you don't have to worry about. You know the kind that is steady, rock solid, dependable? The kind of stock that keeps you feeling "warm and fuzzy" inside, all the time? That stock that when you get home, has the kids in the bed, dinner on the table, your beer is ice cold and she wants to know how your day went?
5. Do you want a stock that you can trust?
Trust is an important component of any relationship. If you can't trust your stock, who can you trust? Do you want to own a stock that "cooks the books?" Do you want to own a stock that has little or no integrity when dealing with issues?
Or, do you want a stock that is open and transparent. One that has a committment to building shareholder value? Do you want to own a stock that you can put invest your hard earned dollars with and expect that the stock will take care of your investment with solid management, good fundamentals and a rock solid committment to protecting its brands and market share? (I know that a company can be a cold heartless beast, but humor me on this one.)
6. Do you want to find really great stocks?
I've been told that there are websites where you can find true love. E-Harmony for example. I know that there are good ways to find great spouses and not so good ways. I won't go there, but needless to say, there are places where you are not going to find quality companies.
Most of those places tease you with lines like: "Bag a double-double with Bruce's Stock Pick of the Month!" (Besides, Bruce is probably going to charge you $198 for his newsletter. Don't go there.) There are places to go where you can find the kind of stock that you would be happy to bring home and introduce to your mother.
7. Where do I begin to look for great stocks?
My first reference point would be David Fish's list of Dividend Champions, Contenders and Challengers.
Here's a link: http://dripinvesting.org/Tools/Tools.asp
What you will find here is a wealth of information that is updated monthly by Mr. Fish. This site provides you with a complete dossier on every stock on the list. It's like you have your own private investigator doing a backround check on all the ladies that make up the CCC group.
Print those lists out. Devour them. Look for suitable matches based on your own criteria and highlight those (get their phone numbers) and then once you have a list, start calling them up and asking them out.
8. Now that you're dating again, what are you looking for?
This is when you start asking questions. This is the time when the stock should be more important than you are. You want to know everything about this company. You want to know things like how old they are. Where were they born. Where did they grow up. What they do for a living. Where they've been and where they're going. Do they have any brothers or sisters (PM-MO-KFT-SJM)
This is where you try find out about the "good, the bad, and the ugly." Every brokerage and many financial sites like Yahoo etc have screening tools. In addition, my brokerage, Charles Schwab offers analysis by Argus Research, Ned Davis, Credit Suisse, Reuters, Standard and Poors and Market Edge. I am sure your brokerage houses have similar reference sources for your review. This is just another place to find out how serious your relationship with this stock is going to become.
9. You think that this stock might be the one for you. What's your next step in the process? Courtship.
Spend time looking into what others are saying about this stock that you are considering. What are the friends of your stock saying about her? How do other suitors rate the stock? Here's where you can go to SA and search for articles about the stock. When you read Argus etc., you get to see an in depth spin on the stock in question. When you compare Argus to Ned Davis maybe you get a little different perspective about the stock. It can't hurt to find out as much as you can--and it doesn't cost you a thing.
One of my favorite places to find out about my stocks is the Investor Relations Department, online. Great stuff there. The point here is, let's not be in to big of a hurry to tie the knot. Engagements are a time to "test drive" the relationship.
10. This stock's the one. Let's take the plunge!
You have done your due dilligence. You bought the ring. You have made your selection. This stock is the one. You are taking the plunge. You make a purchase and now you are all excited about the decision you made, because you took the time to really check this stock out and you learned everything about her.
But hold on there just a minute. This relationship is NOT over! It is going to be an ongoing one--with continuous learning about the stock and there is going to be a lot of give and take in this new relationship. Don't worry if next week your stock is down. It's not out. It's just caught a cold. It will be ok.
Congratulations.
Conclusion:
The best part of finding stocks vs. finding a spouse, is that you can have more than one stock at the same time! You can have 10, 20, 30 or more!
Nurture those relationships. Become so familiar with your companies that you get to know them you like you know your real life spouse. Know when to reinvest in the relationship and it will pay you back with dividends. Monitor performance over time. Don't give up on a stock because its old (KO, PG, CL, KMB). Just because a stock might be an oldy, it can still be a goodie.
Just Sayin
Disclosure: I am long MO, KFT, SJM, PM, KO, PG, KMB, CL.