Minimum Growth Rate

27 Nov 2013 13:10
Tags growth inflation

Back to list of posts

One screen for dividend growth stocks is the percentage growth rate. But. what happens if a stock (after you purchase) fails to increase at your preferred rate?

Most DGI folks have rules when to sell, usually if a company decreases or eliminates a dividend or even fails to increase a dividend (0% growth). But what if the dividend only grew 3%, you planned on 7% and you still like the business, do you sell?

In this case I actually use two rules, the first is to hold the stock for an additional year (sometimes two depending on circumstances) and see where the dividend growth moves from there. Every stock is bound to have a bad year and most growth rates are based on averages so a 3% one year may result in a 15% gain the next giving you an average of 9%. You must be flexible to accommodate for averages.

The second rule I have is to establish a minimum growth rate. Your selected growth rate is usually a preferred rate and may not always be achievable especially if the economy is on a slow growth path. So again to remain flexible you should have upper and lower limits for dividend growth.

To calculate a minimum growth rate for my portfolio I use a percentage based on the average U.S. inflation rate over the last 10 years plus 2%. A problem I have with yearly inflation rates is that they are averages. Inflation rates fluctuate from month to month so for my calculation I use the "Max" inflation rate for each year. Based on this theory my minimum growth rate stands at 5.6%. If a stock cannot maintain this rate it becomes a candidate for a potential sell (note that I said "potential").

Year Ave Max Min Div Growth (Max+2%)
2013 1.51% 2% 1% 4%
2012 2.08% 2.9% 1.4% 4.9%
2011 3.16% 3.9% 1.6% 5.9%
2010 1.62% 2.6% 1.1% 4.6%
2009 -0.35% 2.7% -2.1% 4.7%
2008 3.85% 5.6% 0.1% 7.6%
2007 2.86% 4.3% 2% 6.3%
2006 3.23% 4.3% 1.3% 6.3%
2005 3.38% 4.7% 2.5% 6.7%
2004 2.68% 3.5% 1.7% 5.5%
2003 2.27% 3% 1.8% 5%
10 Yr Ave 2.39% 3.59% 1.12% 5.59%

This second rule is for my overall portfolio. If I see my portfolio of stocks not meeting this growth rate I begin the search for new "buys" while reviewing my list for potential "sells". That said, I may have some stocks with a growth rate of 2% and others at 12% as long as the portfolio dividend grows between a min 5.6% and a preferred 7.2% annually then life is good.

Comments: 0

Add a New Comment
or Sign in as Wikidot user
(will not be published)
- +

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License