Dividend Growth Investments for September 12th

Good Morning,

I wanted to let you know that I added to two existing positions a few minutes ago. I made both of those investments in my retirement account, as those are higher yielding companies.

In general, when I look for companies to invest, I start with the universe of dividend growth stocks. Having a ten year track record of annualized dividend increases is a pretty good initial gauge of quality. That's because only a company that has some unique competitive advantages in a given industry can afford to not only grow the business, but also shower shareholders with rising streams of income on top of that. That's only a good initial first step for me however. 

I also review the trends in earnings per share over the past decade. I prefer rising earnings per share over time, because rising EPS can provide the fuel for future dividend increases and also help support growth in intrinsic value per share. The pattern may have some ups and downs, depending on how cyclical a business is, but overall I expect it to go up over time. This is where you may want to review qualitative factors, try to gain an understanding of the business etc. 

I like to review trends in the dividend per share, and look at the annualized rate of increases over the past 1/3/5/10 years.  I also like to review recent dividend announcements versus the historical record. I do follow the trend in dividends per share closely. If a company stops raising dividends, I will stop adding money to it. If it cuts dividends, I sell. If it keeps raising the dividend, and the fundamentals are sound, I keep holding and may even consider buying more assuming stock sells at the right price and also assuming I do not hold too much in my portfolio.

I also like to review trends in the payout ratio to ensure dividend growth is more of a function of earnings growth than anything else.

I do look at trends in shares outstanding as well, as it gives me another gauge of management capital allocation practices.

Last but not least, I tend to look at valuation. Valuation is more of an art than science, but in general, there are three types of dividend growth stocks. I tend to do a rought guesstimate of attractiveness by adding 5 or 10 years annualized dividend growth + current dividend yield to come up with a certain number of estimated returns.

The three types of companies are:

1) Low yield but high growth
2) Medium yield and medium growth
3) High yield but low growth

As I stated above, estimated returns are a function of crudely adding 5/10 year annualized dividend growth to current yield to get a gauge. This of course is the end result that builds on the work that current investment you are looking at is a quality one. 

Of course, this framework is also done in addition to portfolio management. I tend to build positions slowly, constantly rechecking my thesis against fundamentals and valuation. I tend to limit how much I invest in a given securiry, and have an exit plan when I initiate a position. I hold through thick or thin, for as long as my exit criteria is not met. I may hold on to a stock for anywhere from a few months to several decades. It all depends on how the business is doing.

As I stated above, the amount I invest is limited to a certain % of portfolio. So if I am totally wrong, the most I can lose is 2% for example. But the most I can gain is potentially virtually unlimited. This strategy works with a diversified portfolio of investments, which are filled in only with the right type of quality businesses avaialble at good valuations. And that portfolio is built slowly, and over time. 

That being said, I added to two companies today. The companies include: