I wanted to take the time to lay out my ground rules for investing in dividend growth stocks. If you are interested in dividend growth stock investing you should go through the same exercise. If you are unsure where to start you can definitely take my rules as a starting point and modify them or adjust them to fit your needs and beliefs. Every one has different goals and different life situations, so while my rules may work for me, you may want to change them up to fit more closely to your own goals and life.
My 10 Rules for Dividend Growth Investing
- Only purchase companies I have heard of and companies that I understand how they are making their money. I think it is very important only to trade in companies you understand. For me, I like trading in the big blue chip companies that are recognizable names and I understand how their business operates. Companies like Coca Cola and McDonald’s are good examples. I understand exactly how they make their money, I have heard of them and know they are industry leaders and I believe that they will continue to be selling the same products far into the future.
- Purchase for the long term. My goals are long term wealth and to earn dividend income to offset my expenses in the future. Every single company I purchase is for the long term. I don’t speculate that a company will have a good year and that I can make a quick capital gain by purchasing for a few weeks. I want solid companies that I feel comfortable owning for many years into the future. I purchase for the dividend growth and it takes years for the dividend growth to work it’s magic on my overall wealth.
- Always do a complete stock analysis before each purchase. This is very important because there may be companies out there that I am considering a purchase in. However, when I go to research the stock and do a proper analysis I find out the company may not be as great as I thought or that I believe there are a couple warning signs that could affect future potential. If I don’t do a full analysis with each purchase I may end up buying companies that I shouldn’t have. This could end badly for me and my portfolio.
- Purchase companies with at least 5 years dividend growth. This is a subjective rule for me in which I believe in purchasing companies that have shown the willingness to increase dividends for at least the past 5 years. If dividend growth is less then 5 years then I am not exactly how strong managements commitment to dividend growth is. Now there is always a chance that any company’s management may decide not to raise a dividend. But I believe that companies that have already demonstrated a strong commitment to dividend growth will try everything they can to maintain that dividend growth reputation in the future.
- Sell if company cuts the dividend or fails to increase the dividend after a year. I am a dividend growth investor and I want to own companies that are going to pay me annually increasing dividends. If a company cuts a dividend or fails to raise a dividend, this signals to me that management is not confident in the companies future. They see tough times ahead and this could be a signal that the company is going to face trouble. For me this is enough of a reason to sell and look for a different company to own. There are plenty of good dividend growth companies out there to invest in so keep away from any companies that you may have concerns in.
- Purchase stocks with dividend yield of at least 2.5%. This is another of my own subjective rules. Many dividend growth investors have thier own entry yields and for me I have decided on 2.5% as my minimum entry criteria. There are plenty of good candidates that meet this criteria. Typically the lower yielding the stock is, the higher I expect dividend growth to be. So dividend growth is also something to pay attention to while looking at current yield.
- Dividend growth must be higher than inflation. I want dividends that are outpacing inflation with their growth. This means that I will have more purchasing power with each annual dividend increase. More purchasing power is how you get ahead in wealth. Therefore the minimum dividend growth rate I look for over the past 10 years is 3%. I actually prefer it to be closer to at least 7% but will consider lower. I just won’t consider a stock if the dividend growth is less than 3%.
- P/E must be less than 20 at purchase. It is important to purchase stocks that are reasonably valued. For some stocks a P/E of 20 might be high and I won’t purchase these. In general I like to compare a companies P/E ratio with historical averages of the same company to make a buying decision. But the maximum P/E ratio I will consider looking at a stock is 20.
- No position more than 10% of my portfolio. I like to keep my portfolio diversified so that one or two bad investments won’t end up ruining my whole portfolio. This means not to let a single position be valued at more than 10% of my total portfolio. Personally I am working towards building a portfolio of at least 30 companies so this rule shouldn’t be much of a problem.
- Monitor each stock I own for issues such as earnings or sales decreases. This is one of the most important rules for your portfolio once you have purchased a stock. This is not buy and hold investing but rather I like to refer to it as buy and monitor investing. You must constantly monitor your companies for their reported earnings and sales numbers. Make sure there is not a negative trend in these numbers that may signal future troubles worth addressing now.
There you have it. These are my 10 rules for dividend growth stock investing. Do you have any suggestions? Any rules that I would be advised to add to my list? Please share your thoughts in the comments section below!