Saturday, August 5, 2017. I’m going to run my search. It will first sort thru a database of nearly 8,000 stock issues. My search criteria will be that a stock must pay a dividend of at least .80%. Eight tenths! Why so little? I get that all the time, and the answer is obvious, once you get it. The very highest-quality, safest-growers of dividends, always get chased after by those who know what these companies really are. As a result, their very safety and quality creates what has come to be called, the “Dividend Magnet Effect,” where the ever-rising, steadily growing, super-safe dividend becomes a prime determinant in the price of a company’s shares, and that rising dividend just keeps investors coming in, and chasing that dividend with an ever-increasing share price. Dividend growth and safety results in a higher share price… and, a lower current yield.
Second, I require a high degree of dividend safety, where none are actually going to be paying out any more than 40% of their earnings as cash to shareholders. I still want R&D and marketing to go on with at least 60% of their earnings being retained. I’m able to direct my search, among dividend payers, to those that are in the very Top 10% for dividend safety. Low yield alone, does not determine safety, but low yield, combined with a relatively low payout, does!
Third, I want to see annual dividend growth in the double-digits. Nothing crazy, mind you, but at least 10%, and better if in the teens. But, and this is crucial, their future pathway of earnings growth needs to look like they’ll be able to keep safely growing their dividend at that rate, going forward into the future.
Then, and this is the “Secret Sauce,” I chart all the selections the analyzer brings to me with a long-range, 10-years of EPS, Dividend Payout and Price data. I want to SEE an EPS line that is just as smooth and steady as these can be! This tells me that management is in control of the company’s business prospects, and not so much the vagaries of the outside economy. I like to say that these companies can “write their own check.” Next, when I chart for dividend payout, I want to see an ever-growing, stair-step pattern of dividend increase “Pay Raises” coming out of that lovely earnings stream I just identified. Then, I look at the price chart. This will tell me if it is one of those recognized by Wall Street, as a premier, long-term investment. How can I tell that? That’s the best part!
I chart an average of all the companies presently in the S&P 500. I compare every EPS line, every dividend payout line, and every price chart against the average for the 500. I ONLY want those whose EPS line is smoother, and grew much faster, than that same line for the 500. I want to see a dividend payout line that is safer and far more consistent in its growth, as well as much faster in its growth, than that same average div line for the 500. Finally, I want to see price to have hopefully been less volatile, but more importantly, to have grown and appreciated well ahead of the 500 companies in the index. In short, I select those that have already proven to have been superior investments than the market has been… and, then, monitor them to see that they just keep on doing what they have been doing. It’s really not hard. It’s actually quite easy. And, my performance, when including the safe-dividend growth to the total return, has outperformed the total return of the S&P 500 by a considerable margin.
BUT, none of that is important to me. I’m retired, and my younger wife intends to in about 5 more years. When she retires, we don’t want to have to “adjust” our lifestyle, because we don’t have the money to live as we had thought that we wanted to. While planners help you to adjust to 85%, 75%, or heaven help you, get by on only something like 60% of what you were bringing home in your working life… My wife and I have targeted and are headed for a retirement in which we managed to replace all, 100%, of that income we had coming in while we were working… 100%. We’re on track. We have set our goal, and we are racing toward our goal at a breakneck speed, because we have harnessed compounding, and it is working for us.
Compounding only requires time to work, but that’s what most people don’t do. They don’t give it the time that it requires. But, harnessing compounding, and giving it time… it works every time! Time is the hero of the compounding growth plot.
James P. O’Shaughnessy, in his tome, What Works On Wall Street, while back-testing some 359 different stock investment strategies, discovered that the safe-dividend growth strategy, when coupled with re-investment of dividends, was among the very top, most successful stock market investment strategies there was. He was absolutely correct in his findings, and we are experiencing the living proof that it is working.
I’ll conduct my search, and post the results, as I conduct it, next!
Here’s to your successful investing!
Harold F Crowell