One of the most important factors that separate winning investors from losing investors is the ability to develop a process that you stick to no matter what happens. When you have a process, you take guesswork out of investing, and you stick to the plan through thick or thin.
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Ever since I started focusing on dividend growth investing a decade ago, I have been able to invest my savings regularly, using my process. My process for identifying companies is very simple:
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1) I start with the list of dividend champions, which includes companies that have raised dividends each year for at least a quarter of a century. This requirement ensures that I focus on quality companies with lasting business models
2) I eliminate companies that sell at high P/E ratios above 20. I believe that even the best company in the world is not worth overpaying for. I would much rather buy a quality company at a favorable valuation, than overpay for future growth. Valuation is important.
3) I eliminate companies with high dividend payout ratios. Dividend safety is very important, which is why I want to have a margin of safety in order to lower the likelihood that dividends will be cut during the next recession. Since I plan to live off dividends in retirement, I only want to focus on the companies that can deliver dependable dividend income for me.
4) I also focus on companies that have managed to boost dividends by at least 3%/year over the past 5 and 10 years. We want companies whose dividend payments will at least match inflation.
5) Last but not least, we evaluate the ten year trends in company’s earnings per share. We want companies that grow earnings per share. This provides fuel for future dividend increases and increases the likelihood that the intrinsic value of the business grows over time.
Using the parameters set above, I narrowed the list of dividend champions down to this group of quality companies for further research.
Note: Data as of Sep 2, 2017 obtained from Yahoo Finance!
You may be surprised that I did not screen based on dividend yield. This is because I have found that by focusing too much on yield I may miss out on some great compounders that can deliver high future yields on cost. In addition, by focusing on yield too much, I may also end up chasing yield.
Again, these are not automatic buys or recommendations for you to act on. These are just ideas for further research. I share those types of articles for education purposes, in order to inspire others to develop their own process for evaluating investments.
The most important thing that an investor can do includes:
1) Coming up with their investment goals and objectives
2) Identifying a method for investing to reach their goals and objectives
3) Staying the course, no matter what
4) Keeping their investment costs low
5) Continuing to learn about investing
Thank you for reading!
- Dividend Champions - The Best List for Dividend Investors
- How to value dividend stocks
- My Entry Criteria for Dividend Stocks
- Why Investors Should Look Beyond Typical Dividend Growth Screens
- How to become a successful dividend investor