This is a guest post written by Mike McNeil, author of the Dividend Guy Blog and co-founder of Dividend Stocks Rock. Mike is currently investing $100,000 in a 100% dividend growth portfolio as the market trades at an all-time high.
Regardless where I look these days, I read alarming news about the stock market. Government debts are through the roof, there are tensions among many countries, debt is “too cheap” and we make a bad use of it, interest rates are climbing up and the stock market doesn’t listen to reality, like Icarus reaching for the sun. As Icarus’s story, once our wings will be burned by the sun, the fall will be fatal. This is obvious; everything is set to have the market crashes and burns.
I recently quit my job as a private banker to work full-time on my investing website Dividend Stocks Rock (DSR). This is how I received $108,000 as a lump sum for my pension. What am I going to do with this new money? What should I do as a dividend investor? Should I keep money aside and wait for a correction?
This could be argued to be an interesting strategy if you think you can time the market. However, for a dividend growth investor, we should all know that time in the market is a lot more important than market timing. We should ignore the noise and keep investing. This is what I’m doing anyway. I decided to invest it all in the stock market now; because when the stock market goes down like this:
Source: Ycharts
I know my dividend payments will go up like this:
Source: Ycharts
While the stock market has more than doubled over the past decade (including the terrible crash of 2008), many dividend paying stocks not only showed capital appreciation, but double, read triple their payouts. The best part is whenever the market crashes again; most of those stellar companies will continue to raise their dividend. If you pick your companies carefully, your dividend growth won’t be affected by the noise coming out of the market. You will continue to increase your investment revenue no matter what happens. You will even have the opportunity to invest during the market downturns through reinvesting your dividends.
The problem with an overvalued market is that the hype acted like a wave on the stock market; even garbage at the bottom of the ocean got brought back to the surface. Therefore, all companies look great right now. This is why I’ve developed my own strategy to select companies that will not fail with their dividend growth duty.
Avoid the Bad Seeds, Focus on the Dividend Triangle
I’m ready to invest a substantial amount in the stock market now, but I don’t do it blindly. At the moment, there are lots of dividend growth stocks trading at premium. How do you know which one is a good pick and which one is a bad seed? We could argue all day long about various valuation methodologies. But you and I will agree with something; no matter how many hours you spend determining the value of a company, your results will only be as good as your assumptions.
Instead of trying to figure out if a stock is cheap or not, I rather focus on the company itself. The first screener I use to start my research is what I call the dividend triangle, I focus on companies showing those tree pillars:
#1 Revenue growth
#2 Earnings growth
#3 Dividend growth
This sounds like a simple method, but this is only the start, the foundation of my research process. A complete investing strategy is required to make sure you make the right decision. However, you need to start with something. I start with these 3 metrics.
While I focus on companies increasing revenues, chances are they will make more profit. With additional earnings, chances are dividend payments will continue to rise. Since I aim at dividend growth stocks only, this is a simple but efficient equation.
The stock market will do whatever it wants; going up, going down, going sideways, etc. The key is to select companies with a strong business model that were able to show revenue, earnings and dividend growth over the past decade. Those companies will be affected by a correction and their shares will plunge accordingly. However, their dividend won’t and that is what truly matters. Did you know that it took less than 3 years to recover from the worst market crash ever? If you can’t wait three years for your portfolio to show its original value, maybe you are not up to investing.
A Special Attention to Dividend Growth
Beyond dividend yield, there is dividend growth. To be honest, the dividend yield doesn’t matter to me. I even picked stocks with yield as low as 1.50% (Disney (DIS)) for example. What really caught my attention is management’s will to increase this payout year after year. Here’s an interesting quote from Saturna Capital:
“Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”
A company showing a strong dividend growth over many years is the ultimate sign of a healthy business. This is kind of business that will ride any storms in the market and will continue to raise its payouts in the meantime. These are the kind of companies I want in my retirement portfolio.
Writing a Strong Investment Thesis for Each Holding
Looking at past data is important and a crucial part of my investing process, but looking into the future is even more essential. This is where writing down my investment thesis comes in handy. Too many times, investors get lazy for this part. They spend hours filtering data, going through statements and then, they pull the trigger without writing down all the reasons why this company will continue to do well in the future.
In my investment thesis, I define the company’s business model and I identify why it is so successful. I also list its growth vectors to ensure future dividend increase. A company could be dominant today, but lack of drivers to sustain its revenue growth. A company like Altria (MO) is a good example. It’s a dominant company, paying a strong dividend and generating lots of cash flow. However, in 10 years from now, how will Altria be growing its revenue? There is no answer to this question right now.
My investment thesis will also be of a great help when it is time to review my holdings and decide if I should sell some of them. Instead of watching the stock market going higher and feel it’s time to sell before everything collapses, I focus on the reasons why I bought those shares in the first place.
Each quarter, I review all stocks in my portfolios. I look at their financial results and answer these two questions:
A) Is the company heading towards my expectations (e.g. is the potential being realized or was it just a mirage)?
B) Does the company still shows future upside potential (the stock may go up, and still shows it could climb higher)?
When the answer to one of these two questions is a blunt “no”, the sell is triggered.
Finally, my investment decisions are motivated by the fact that the company confirms or infirms my investment thesis. Once the reasons (my investment thesis) why I purchased shares of a company are not valid anymore, I sell and never look back.
Finally, I look at the Valuation
The last step of my investment process is valuation. As I mentioned earlier, valuation is important, but it is also based on numerous assumptions.
Here’s an example of my favorite pick right now
One company I really like lately is BlackRock (BLK). The company shows an impressive combination of a strong core business through its institutional clients and growth vectors through its ETFs and Advisor investment platform; Aladdin. Over the past decade, BlackRock never failed its investors:
Source: Ycharts
BlackRock is the world’s largest asset manager with over 4 trillion in assets under management (AUM), operating in 41 countries with over 1 billion each in assets to manage and serving clients in over 100 countries. BlackRock serves all kind of clients (from retail to its 4,000 institutional clients and pension plan managers) through its wide range of products (from mutual funds to ETFs). Blackrock is also the largest ETFs manufacturer through its iShares products. The ETF investing trend is established and solid.
An investment in BlackRock is an investment in a leader in a flourishing market. Retirement planning is the financial issue of the century as many workers don’t benefit from fully funded pension plans. When you are the largest ETF manufacturer, you can be sure to grab an enormous market share of those workers and institutional fund managers looking for new investment products. Through its platform for advisors, Aladdin, Blackrock helps them to select the best investment vehicle possible. Through regulations in the work by The Department of Labor (DoL), advisors will have the mandate to select the best product for their client. They will have to ignore those juicy 2%+ mutual funds and aim at lower cost options… read ETFs.
Disclaimer: Mike holds shares of MMM, JNJ, CNI, KO, MSFT, BLK in his Dividend Stocks Rock Portfolios
Relevant Articles:
- 3 Dividend Stocks Trading At A Discount
- Three Of My Favorite Dividend Stocks For 2017
- Honeywell Beats GE On The Following Four Points
- How to Find Dividend Stocks With The Market At All-Time Highs.
