Dividend growth investing. The basic concept of DGI investing can be found right in the name.
1)Focus on stocks that provide dividends
2)Focus on dividends that have a track record of increasing
But if I left it at just that I would be doing you a massive disservice. Truthfully there are a myriad of other important factors that go into this. Recently however, DGI has been picking up steam as a safer and smarter long term strategy. Even more recently, contrarian pieces have been sprouting up here and there. I want to go through a few of these other important factors to consider.
The main items of concern when we begin to value a particular stock can be drilled down to the P/E ratio, dividend yield, projected growth, payout ratio and the amount of time (years) that the particular company has raised dividends. How we choose to apply these factors will begin to align us with other strategies. My personal opinion in this long term dividend growth strategy is to align with value investing.
By choosing to set rules around these figures we can begin to drill down on particular issues that fit the scheme. In this wide world of investing it helps to set parameters that allow you to have a manageable amount of options with which you can dig deeper.
Speaking to these “parameters” - this is what I typically use as rules. The P/E ratio needs to be below 20. Anything above this and you are paying for future growth that may or may not happen. There will always be companies you look at as a sure shot even at a 40+ P/E, but we have to consider the value we receive from our money, especially when we are truly focusing on dividends. A company will pay a dividend based on earnings and free cash flow, not on what the market values them at.
So if company A cost $100 a share with a p/e of 40 and had a $1 annual dividend, than you will receive a 1% yield on cost. However, if the same company were fairly valued with a p/e of 20 and $50 share price you would receive a 2% yield on cost.
While these may be basic concepts for some, it is crucial to understand for all. Dividend growth investing is a fairly straight forward and quantifiable strategy, but it is also easy to mess up. Your success is fully predicated on finding value.
I personally aim to find above 2.5% for dividend yield, coupled with less than 60% payout ratio. I have some room to bend on this but this is part of the process where you dig deeper and make decisions that you have to live with. Another factor that goes along with this is a minimum of 10 years of raising dividend payments.
Projected growth is a bit trickier but the aim here can be maleable in accordance with what makes you comfortable. For me I am for 10%, this number also includes projected dividend growth. So if the stock raises 4% and the dividend raises 6% - that qualifies as my 10% annual growth.
These are some of the most important metrics that I consider when initially valuing a stock. This would create my list of “see further” stocks that I would begin to critique on a more detailed leveled.
Well if you made it this far then I sincerely hope you enjoyed the inaugural post. I will go into some detail myself at a later date, but let’s be real your not here to hear about me in particular. You’re here to learn! I am still learning myself, but really enjoy finding answer and analyzing thise answers to finer understanding. So with that in my mind feel free to ask questions and let me know me know what you think. Thank you so much for stopping by dgifire.
With all this talk of conservative value investing I want to leave you with a quote by the man himself to give a little perspective and rationalize the concepts. Remember we can go to far in either direction -
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- Warren Buffett
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am not a professional and this article is opinion only and should not be construed as advice.