The real problem with nearly every trader and investor is… they almost all have unrealistic expectations of the market, and themselves. But, worse, I think, is that they strive for an entirely WRONG objective! Nearly every market participant engages in the efforts to trade or invest… to GROW THEIR CAPITAL. And, for the most part, very few succeed. Most do not even outperform the market. They buy high. They sell low. They buy the wrong issues. They ‘listen to their gut’. They have no strategy. They have no discipline. In short, they haven’t got a clue!
The truth of the matter is really very simple. One can generate fabulous wealth and income, if only they would get in early, and often. Buy and accumulate shares early in life, add more, as frequently as possible… and, above all… buy shares only in those companies that exhibit a few unusual characteristics that should cause them to stand out to anybody… if, only they knew what to look for.
The first real trait to look for is… How safe is their dividend? By that, I mean, what % of their EPS is being paid out to shareholders as a quarterly cash dividend? It needs to be under 40%, in order to be considered safe.
Next, since it is paying out a safe-dividend from out of its earnings, just what does its historical EPS line look like? Does it trend upward at a smooth rate through nearly every economic phase over at least the past decade in time? I say that companies like these; those that control their own business/financial destiny… demonstrate the least amount of influence from outside economic factors… these companies get to ‘Write their own check’! Why do I want to find these kinds of companies… safe-dividends, with a steadily increasing EPS line? That’s simple.
These are the only companies that are Safe-Dividend Growers, and they are the only companies you want to hold stock in! The reason for that is; this third factor I always look for. I chart the past dividend payout pattern, and I want to see a stair-step upward pattern of an ever-growing dividend income stream to ME as their shareholder, at a rate that handily exceeds inflation. Period!
Let me summarize. I, first, look for the very safest dividend payers. I, then, second, look at their EPS line, going back for at least 10 years, to study its rate of grow, and the pattern of its trajectory. I want the smoothest, upwardly trending EPS lines I can find. Then, thirdly, I look at their Dividend Payout pattern, for a characteristic stair-step dividend growth rate that is very often in the low double-digits, typically, at least 10% or greater annually.
That’s it! That’s all one needs to do. A low dividend payout rate, under 40%. A smooth, upwardly trending EPS line, that typically is both smoother, and growing faster than the general market. And, a shareholder-friendly company that knows there are investors, not traders, looking for a steady growth in their dividend income.
By this means, I recently wrote about Ross Stores (ROST) and A.O. Smith (AOS). These are a couple of those very best ideas. I have some, and given the right circumstances, I’ll likely buy some more later.
Here’s to your successful investing!
Harold F Crowell