Here I’ll post my current stock picking strategy. This is my initial screen to determine if a stock fits my ideals as a dividend growth investor. This is the minimum that a company must follow for me to then further analyze to decide if I would like to invest and at what price would be an ideal entry.
Dividend Beginner’s Stock Picking Strategy
For Canadian Companies (Listed on the Toronto Stock Exchange (TSE))
1. The company must have paid increasing dividends for a minimum of 10 years
WHY: A company that has paid increasing dividends for 10 years already is likely to continue this trend and unlikely to break their streak. It also shows that management values their shareholders.
2. The stock must yield a minimum of 2.00%
WHY: As a dividend growth investor, I like large dividend yields. 2.00% is pretty low, and anything below that is very uninteresting to me. However, with 2.00% as a minimum, combined with Metric #5, it will at least have a decent yield given some time with a large growth rate. I’d like to aim for above 3%, but won’t knock a stock for going a little below that.
3. The stock must have a P/E (TTM) no higher than 20.
WHY: Paying 20x what a company currently earns is a lot. Unless you know the company will be making a ton of cash and has incredibly future prospects, paying more than 20x earnings could be dangerous and may make it difficult for the stock price to appreciate. Speculating is not what I got into the dividend growth game for, so I’ll leave that to the speculators who wish to purchase stocks at a P/E of higher than 20.
4. The stock must have a 10 year YOC of at least 6.00%
WHY: The whole point of dividend growth is so that later in life you can reap rewards from the seeds you planted TODAY. If I’m not getting a yield of at least 6% in 10 years from now, then you’re not generating a ton of future cash flow in relation to your investments today. This is one of the most important metrics for my dividend growth.
5. The company’s dividend payout ratio must be below 80%.
WHY: 80% might even be a bit on the high side, but if the company is paying out more than they earn, there’s no chance they could keep up with it over an extended period of time. What will they do if the payout exceeds earnings for too long? They CUT the dividend. You never want one of your dividends to be cut. It’s a great sign that trouble is to come and you might no longer want to be a part of that company as a dividend growth investor.