Investing Rules

Stocks Meet Initial Screen

Dividend Yield & Growth Rate
Among dividend growth investors these number will vary. To meet my goals I need the following minimum dividend growth rates.

Yield Min Growth Rate
2.00% 11.50%
2.50% 9.70%
3.00% 8.00%
3.50% 6.70%
4.00% 5.50%
4.50% 4.30%
5.00% 3.20%
5.50% 2.00%
6.00% 1.00%

Debt/Equity Ratio is less than 1
The debt to equity ratio is important to me as it represents how well financially managed the company is and how much room a company has to borrow (or leverage) money. Most dividend growth stocks have mature products or services that can over time get stale. To maintain growth a company needs to occasionally invest a large amount of money to re-energize earnings growth. With a low debt to equity a company has easier access to credit to quickly infuse cash to fuel new growth that allows them to rapidly respond to market changes.

Payout Ratio is less than 60%
The payout ratio indicates how well earnings support the dividend payments. The lower the ratio the more room a company has to grow its dividend while higher ratios are risky as any negative changes in earnings (even slight) could jeopardize dividend payments.

Company has to be simple to understand
I have a job & family to maintain so my time is valuable. A company’s products or services, as well as financials, need to be something I understand and relate to. If I have to spend days reading and interpreting financials it takes away time from me analyzing other stocks.

No Bad News
No negative news announcements about dividend cuts or elimination
Company has no plans to merge or being bought out

Stock is Well Positioned in Their Industry or Sector

Conservative Financials
Complete financial statements analysis for Liquidity, Profitability, Credit Risk, Share Holder Value and Growth, where financial ratios and trends meet or exceed their top competitor (see Blog series on Annual Reports and Financial Statement Analyzer Tool) .

P/E Ratio is equal to or less than its peer group
The P/E ratio is a good indicator as to how well the market values the stock in relation to stock price and annual earnings per share. Some investors use a set number as a baseline (like 20 or less) but I prefer to base it on the same industry so I can compare and understand if a P/E is good or bad.

Company is Investing for Growth
Mergers and acquisitions (M&A) align with company goals.

Consistent Research & Development spending trends from year to year. (Note: this does not apply for service products such as consulting or management).

Capex Ratio is greater than 0.9.

How Much and What to Buy

Minimum investment amount $1,000
Among investors this number will vary or may even be a minimum number of shares to buy. The amount should be what you are comfortable with while limiting brokerage fees. For me the $1,000 mark represents how much I have saved after 3 months (div payouts + contributions) so it simplifies my investments to once a quarter. Over time this amount will increase as my dividend earnings increase.

Remain diversified over different industries or sectors
Being diversified is a means to reduce your risk. If you are like me your employer frowns on things like watching and trading stocks while on the job. If you invest in just one company and they release news that they are eliminating their dividend then by the time you get home from work and discover this you may have already lost 20% in stock price or more. By being diversified it should smooth things out as you may have some stocks up to offset some stocks that decline. For some investors diversification is owning a variety of stocks but for me the rule is to diversify by sector and industry.

Selling Rules

Company does not increase dividend within 24 months.

Company announces decrease in dividend.

Company suspends or eliminates dividend.

Company announces a merger or buy-out.

Significant negative financial news.

Prune Ratio is greater than 4.0 (either reduce a position i.e. prune or sell entire position)

Dividend Re-Investment (DRIP) rules

Only DRIP when dividend yield and dividend growth rates are attractive (see dividend growth rate table in "Initial Screen" section.

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