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 on the low side, and anything below that is not interesting 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 the company will be making great profits in the future, paying more than 20x earnings could be risky and may make it difficult for the stock price to appreciate.
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. Generating a yield of at least 6% in 10 years from now is strong future cash flow in relation to your investments today. This is an often overlooked, but very important metrics for dividend growth stocks.
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, it’s unlikely this can be sustained for an extended period of time. If the payout exceeds earnings, the company will cut the dividend. Dividend cuts are a clear sign that a company is in trouble and you might no longer want to be a part of that company as a dividend growth investor.