I prefer systematic investing for the simple but important reason it helps me avoid the dreaded trap of emotional investing. The first, and most important, step in developing a consistent and reliable approach to choosing dividend growth stocks is to develop a standard list of screening criteria. This criteria enables you to quickly sort through lots of data quickly and efficiently and create short list for further evaluation. Here is the method I use to evaluate and invest in dividend growth stocks (DGS):
Stock Screening Criteria:
1. P/E Ratio less than 20 (P/E <= 20)
The price-to-earnings (P/E) ratio is a company’s current share price divided by its earning-per-share (EPS). In simple terms, the P/E ratio represents the price investors are willing to pay for $1 of a company’s earnings. A P/E ratio less than 20 is an indication that a company is fairly to potentially undervalued. A P/E ratio over 20 means the company is overvalued and something to wait on. The P/E ratio is the valuation metric.
2. Payout Ratio less than 60% (Payout <=60)
The Payout Ratio is essentially the percentage of a company’s cash that is paid out in dividends. A Payout Ratio below 60% is an indication a company is in a good cash position where it maintains cash on hand to either hold or reinvest in the business. It can also indicate that there is room for the company to continue to grow its dividend in the future. Payout Ratio is a margin of safety and confidence metric.
3. Yield is greater than 2.25% (Yield >= 2.25%)
Dividend yield is the amount of dividends a company pays per year relative to it share price. Since I invest in dividend growth stocks (DGS) to build a passive income stream, it makes sense to require a minimum yield to generate the maximum cash flow. The higher the yield, the better the corresponding cash flow (dividends). This is a cash flow metric.
4. Chowder Rule Score greater than 10 (Chowder Rule >= 10)
Essentially, the Chowder Rule is the sum of a company’s current dividend yield plus the five-year annual dividend growth rate (DGR). A score that equates to 10 or above ensures that I’m not only getting a good yield today, but there is a good probability that the dividend will materially increase in the future as well. The Chowder Rule is a measure of both dividend yield and dividend growth rate and commonly is considered a “total return” metric.
5. Dividend increases for at least 8 consecutive years. (Consecutive Increases >= 8yrs)
Investing in dividend growth stocks (DGS) is all about finding companies that will consistently raise their dividends every year and to that end, you want to build in some reassurances that you can count on a company to do so. I’m comfortable that once a comp5 simple rules to find undervalued dividend growth stocksany increases their dividend every year for at least 8 consecutive years, there is a good chance they will continue to do so in the future. Obviously, the gold standard is the Dividend Aristocrats who have increased their dividends for the last 25 years, but DGS investing is also about finding the next Dividend Aristocrat.
I run this screen on a monthly basis and use the the output to conduct further research on each company that passes this initial screen. In my opinion, any screen or initial research should start with David Fish’s CCC (Champions, Challengers and Contenders) list which is a phenomenal resource with tons of information and is updated at the end of each month.
Obviously, any screen contains a certain amount of subjectivity and is just a starting point for additional research. Once the screen is complete, I move into the valuation phase of the process in an attempt to find a fairly valuable company with solid growth potential which I can add to my portfolio.
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Disclaimer: I am not a investment or financial professional of any kind. Any information contained within this site is for informational purposes only and should not be considered advice or a recommendation of any kind. All information is simply an opinion and should be treated as such.