This is a guest post by Mike, aka The Dividend Guy. He authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Rock. He is a passionate dividend investor.
I had the chance to start my investment journey at a relatively young age, I was 22 when I made my first trade on the stock market. Back then, I didn’t have a detailed investment process designed. If there is one thing that I have learned since then is that investing success goes through a solid investment process. If I want to build a strong portfolio, I must have a strong methodology to select the right companies. This is the way to go for any investing strategy, and it is also the case for dividend growth investing.
I’ve noticed that not all dividend investors think the same. To my surprise, there are some important differences between most of us in the manner in which companies are selected. For example, I’m definitely not a yield seeker. In fact, if there is one thing I don’t consider during my investment selecting process, it is the dividend yield! I focus on the dividend growth as a pillar of my investing strategy. I’ve established 7 investing principles around dividend growth to manage my portfolio.
I wanted to share these principles with you by giving you eight examples of companies that meet my investing criteria and should create a solid base for any dividend growth portfolio.
Principle #1: High Dividend Yield Doesn’t Equal High Returns
Many investors give greater consideration to the actual company dividend yield or the payment in dollars they receive each month. I often read remarks from retirees telling me it’s easier for younger investors to focus on growth and that retirees don’t have time on their side and they can’t wait to see a dividend payment increase.
My first investment principle goes against many income seeking investors’ rule: I try to avoid most companies with a dividend yield over 5%.The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly come with dividend growth and this is what I am seeking most. The fact is that almost all companies paying over 5% yield are not able to increase their payout each year. Their management eventually struggles to make their payment and there is an inevitable cut.
In order to validate this point, I look at the dividend payment and compare it to the stock yield over the past 10 years. An increasing yield without an increasing dividend payment is a strong red flag as it tells you that the stock price is dropping. On the other hand, you want a company with strong dividend payment increases and a steady yield. This leads you directly to the jackpot: both capital and dividend growth!
A great company meeting my first principle is Walt Disney Co (NYSE:DIS). Back in 2010, the company paid a total of $0.40/share for a very low yield around 1%. Many income seeking investors are ignoring Walt Disney Co (NYSE:DIS) for this reason. In 2016, the company is currently paying a 1.50% dividend yield. Here again, nothing to write home about. However, did you know that DIS pays over three and a half time its 2010 dividend payout?
If you would have bought Walt Disney Co (NYSE:DIS) in 2010 at $37, you would be yielding 3.80% on your investment. And I’m not counting the astonishing stock return. This has been possible because the company successfully manages its brand portfolio. ESPN has been the company’s most important growth vector over the past few years, but as it is currently cooling down, theme parks and movies divisions are picking up to keep the growth pace.