Investments for March 9

Good Morning,

I have discussed before that I believe there are three types of dividend growth stocks.

1. The first group is lower yielding companies which offer the promise of above average dividend growth. Examples include Tractor Supply (TSCO), Dollar General (DG) etc. These companies may not yield much today, but offer the promise of high future yields on cost, provided they keep executing. Of course, the issue is overpaying for that future growth. The core issue is that this future growth may not be as durable and lengthy as expected.

2. The second group includes companies in the sweet spot - those with moderate yields and slow but steady dividend growth. Examples include Johnson & Johnson (JNJ), PepsiCo (PEP) etc. Those companies tend to deliver respectable results year in and year out. If their business model is durable enough, they could compound for a long period of time, and result in very respectable future yields on cost. Usually underappreciated by those who chase future growth and those who chase future yield too. 

3. The third group includes companies that have above average yields, but have slower pace of dividend growth. Examples include companies like Realty Income (O), Verizon (VZ) etc. This is a good group for high current income. However, chances are the dividends may not keep up with the pace of inflation, leading to an overall decrease in purchasing power. You may also have a higher payout ratio, which could increase the risk of a dividend cut if the economy gets into a recession.

I believe that a well-rounded portfolio would have all three types in it. However, investor preferences may lead the to weight some companies more than others. I wouldn't weight only one group of companies however. Each group of companies would have its own unique sets of trade-offs. 

I decided to nibble on two existing positions today. Both companies seem cheap. Both companies are in the third group, which is underweight in the Dividend Growth Investor Portfolio.