stock-trading

Stock Trading Advice on Investment Plans

Every trader needs stock trading advice. This is especially true for investors who are just starting out in their careers. Of all the different kinds of expert tips available though, the most important ones revolve around trading systems.

Go For a Plan

Systems are essentially plans for you to follow when you need to make trading decisions. The logic of having a plan in place is obvious when you consider that trading is a highly risky undertaking. The sad news is that there are many traders who dive straight into trading, wanting to make loads of cash without even considering what their objectives are and how high they can tolerate loss.

The most ideal trading advice is to put your money on creating a system. With a plan, you can easily pinpoint entries and exits. Furthermore, a good plan can help you plot money management rules so you can limit your chances of losing all of your capital on bad trades. In short, a system can be your key to surviving the unpredictable nature of the stock market and to making profits.

stock

Skip Black Box Plans

Systems that are labeled black box function automatically. They give out recommendations that are meant to be followed without questions. This may seem like a convenient set up but in reality, it may actually be dangerous. It’s never a good idea to follow suggestions if you aren’t fully aware of what they are based on.

In addition to not using black box systems, one other great trade advice is to evaluate your decisions carefully. You should consciously make decisions that match your personality and identity as a trader. Using an automated system could mean getting slapped with risk levels that are too high for you. This means there is a high chance that you will lose more than you are willing to let go of.

Test Your Plan

Whenever possible, you should create a trading plan. If you feel thought that devising a system is a bit too much for you, you can adjust a previously made system to fit you. Whatever you decide on though, it is crucial to follow the stock trading advice to back test a system before using it.

Back testing is the process of using a plan to make trades based on historical data. This means you don’t actually have to use real money and present market data. This implies that testing will not be able to provide extremely accurate results. Despite using past data however, there is still a good chance that systems that churn out good results will work well in current market conditions and situations. Aside from determining the effectiveness of a system, testing can also help you spot weaknesses that you can correct before you start to trade with your plan.

You’ll never run out of great pieces of trading advice. Take note though that the most excellent tip you can ever follow is to use a custom trading plan that has been back tested. Systems are the real secrets to profits that can make even non-technical experts rich in the stock market.

Understand-investments

Dividend Stock Quality – Making Sense of Credit Ratings

I’ve been reading more about Chowder’s Rule recently as I wanted to learn more about one of the columns in the US Dividend Champion list (it’s tucked away on the right hand side of the sheet in column BZ).

One of Chowder’s first rules in his stock screener is to find companies of “good quality”. But what does that mean?

What is Quality?

Back when I was at University studying Electronic Engineering, a friend of mine was studying Manufacturing. He used to talk about going to “Quality lectures” and I thought he simply meant any lecture where the professor did a good job presenting the course material. It took me some time until I finally realized that “Quality” was actually a subject all on its own! Yes, I can be pretty slow sometimes.

As it relates to Companies, the trouble with “Quality” is that it means many different things to many different people. In many ways Quality is in the eye of the beholder, and while its effects can be seen, it’s hard to measure.

Does the fact that a company increases dividends for 25 years mean that it’s a high quality company, and if so, what’s the magic number when the quality threshold is reached – 5, 10, 25 years? Is it cash flow, earnings growth, financial strength, profit margins, all of the above? Quality isn’t a simple value you can just plug into a stock screener in the search for quality.

Measuring dividend stock quality

For a quick initial yes/no litmus test on whether to investigate a stock further; Chowder’s approach and definition is simple:

“High Quality is defined as having superior financial strength. A company must have a 1 or 2 rating for Safety with Value Line, or a BBB+ rating or better with S&P. Both of these Financial Strength ratings indicate investment grade quality. … Anything that doesn’t meet the High Quality definition is considered speculation and managed differently within the portfolio.”

Companies have credit / investment ratings assigned to them, much as we have our own personal Credit Scores. Companies with low investment grades must pay higher expenses when borrowing money because they’re considered to have a higher risk of not paying their debt (aka defaulting) than highly graded companies. And you can imagine that there’s an army of people involved in researching and determining each company’s grade because of how much money is involved in that industry.

The S&P rating mentioned by Chowder is one agency; here’s a quick comparison of some credit ratings available on the web as well as the things I learned along the way.

400-05702795 ? lucadp Model Release: No Property Release: No lot of numbers in a spreadsheet and charts over it (3d render)

S&P Investor Rating

You can obtain credit ratings for individual companies over at standardandpoors.com. You’ll be asked to create an account and supply email, password and name but it’s otherwise free and there are no charges. Their website is quite a pain to use because you have to pull each symbol individually however, and none of the screeners in my brokerage accounts allow this rating as a search criteria.

The S&P rating methodology grades companies from AAA (the highest), through AA, A, BBB, BB, B, CCC, CC and to R (in default). The symbols ‘+’ and ‘-‘ are used to denote positions with a rating e.g. AAA+ > AAA > AAA- > AA+.

Using Chowder’s definition, grades AAA+ through to BBB+ are investment grade companies and grades BBB through to CC- are speculative. Note that officially per the S&P rating, all BBB grades are investment quality not just BBB+.

Value Line

I didn’t try to get the Value Line ratings. The sign up process looked more complicated than at S&P and they seem very interested in promoting their newsletters and stock selection methodology so I stayed away…

Moodys

And went to Moodys instead which is a competitor to S&P. Their signup process is very similar to S&P’s (email, password and name) but I found their website better organized and it contained more information. It’s free to sign up and get basic ratings but there are charges for premium reports that detail the ratings and research on each individual company. I was still not able to find a list of stocks with a given credit rating, although their search tools are better than the S&P site.

Moodys’ rating methodology is more complicated than S&P’s with 25 different classifications. There’s the basic classification of Aaa (highest), then Aa, A, Baa, Ba, B, Caa, Ca and finally C (the lowest). Then within each rating (except for Aaa), there is an additional rating of 1, 2 or 3 showing the relative position within the rank. So Aaa > Aa1 > Aa2 > Aa3 > A1 > A2 > A3 > Baa1.

The grades of Aaa through to Baa3 are considered investment grade. Grades from Ba1 to Ca3 are speculative and C is in imminent danger of default.

Morningstar Credit Rating

Morningstar has their own credit rating score too. You can find it hidden on the “Bonds” tab of any individual stock quote page. Or you can view the entire list. This is a much easier system to work with than either S&P or Moodys, and is likewise freely available. One disadvantage here is that the coverage is not as high as with the previous two systems; I could not find scores for 6 companies that S&P and Moodys rated.

Morningstar’s scale is simpler though: AAA, AA, A, BBB, BB, B, CCC, CC and C. Any rating of BBB or higher is “Investment Grade” and ratings of BB through CC are considered more speculative grades. C is the rating that denotes imminent default on loan payments.

S&P Capital IQ Quality Rating

Finally I looked at S&P Capital IQ’s Quality Ranking score. S&P Capital IQ is related to the S&P Ratings service as they’re both owned by the same parent company – McGraw Hill. However Capital IQ is a more general investment data and analytics company competing with Bloomberg and Reuters.

The Capital IQ Quality Rating isn’t a standalone credit score; it rates growth and stability of earnings and dividends. This rating is not the same as the Capital IQ ‘star’ rating which is an aggregate of additional criteria. The Quality Ranking score is defined in a range from A+ (highest), A, A-, B+, B, B-, C+, C (lowest). Since it’s not a credit score, there’s not really a concept of Investment-Grade but the B+ score is considered “average”. So you could take either B+ or A- as a minimum threshold.

You can find the Quality Rating (and definition) on any S&P Capital IQ analysis report which are freely available via the Sharebuilder brokerage research tools and other brokerages. The Sharebuilder stock screener also includes this rating as a search criteria.

How do my stocks score?

I’ve normalized all the scores from the stocks in my portfolio to a common standard; using the Capital IQ scale as a baseline.

For Moodys, the conversion ignores the 1,2,3 classifier so I mapped Aaa=>A+, Aa*=>A, A*=>A-, Baa*=>B+, Ba*=>B, B*=>B-, etc.

For S&P, the conversion ignores the +/- classifier, e.g. AAA*=>A+, AA*=>A, A*=>A-, BBB*=>B+, BB*=>B and B*=>B- etc.

Finally for Morningstar, I used a similar scheme as the S&P conversion: AAA=>A+, AA=>A, A=>A-, BBB=>B+, BB=>B and B=>B- etc.

This yielded the following results for the stocks in my portfolio

Symbol Moodys S&P MorningStar Capital IQ
MSFT A+ A+ A+ A-
PFE A- A B+
T A- A- A- B+
ROC B B+ B
XOM A+ A+ A+ A
HD A- A- A- A
JNJ A+ A+ A+ A+
AXP A- B+ A- B+
PG A A A A+
UPS A A- A- B
CVX A A A A
MCD A- A- A A
JPM A- A- B+
KO A A A A+
INTC A- A- A B+
DOW B+ B+ B+ B-
AWR A- A- B
ADP A A A
UNP A- A- A- A+
KMB A- A- A- A
GXP B+ B+ B+ B
APD A- A- A- A
LNT A- A- B+
GIS A- B+ A- A
MAR B+ B+ B+ B+
RTN A- A- A- A+
TROW A-
LB B B+ B+
CB A A A- A
BMS B+ B+ B+
EMR A- A- A- A+
LMT B+ A- A- A+

Missing results

The Moodys and S&P Ratings are not always available for a given stock symbol. Here’s a quick run through the stocks in the list above where I couldn’t initially find a rating. Another place to find the rating can be the company’s Annual Report.

Rockwood Holdings (ROC)

ROC’s debt is issued by one of its fully owned Subsidiaries, Rockwood Specialties Group. Using the conversions above, this rates a normalized B for Moodys, or B+ from S&P.

American States Water (AWR)

AWR’s debt is mostly dependent on its subsidiary, Golden State Water Company (GSWC). This rates a normalized A- for Moodys and an A- from S&P.

T. Rowe Price (TROW)

TROW aren’t rated by S&P or Moodys simply because they have no debt!

Summary

While the Capital IQ ratings are by far the easiest to query and are readily available for every stock I’ve searched for; I think I’ll pay more attention to Moodys credit rating going forward. I think it’s more focused than the Capital IQ rating and since it can directly affect the cost of borrowing of a company, it’s a meaningful rating. I’m pleased to see that most of the stocks in my portfolio have a good credit rating though!

Based on Moodys scores, my two lowest quality stocks are ROC and LB although the news is not all bad. ROC is currently under watch for a possible upgrade after the announcement of the pending sale to Abermarle. LB was upgraded one step in 2011 due to strong performance and debt repayment, putting it in the top tier of its grade and the company currently has a stable outlook.

I’ve been reading more about Chowder’s Rule recently as I wanted to learn more about one of the columns in the US Dividend Champion list (it’s tucked away on the right hand side of the sheet in column BZ).

One of Chowder’s first rules in his stock screener is to find companies of “good quality”. But what does that mean?

What is Quality?

Back when I was at University studying Electronic Engineering, a friend of mine was studying Manufacturing. He used to talk about going to “Quality lectures” and I thought he simply meant any lecture where the professor did a good job presenting the course material. It took me some time until I finally realized that “Quality” was actually a subject all on its own! Yes, I can be pretty slow sometimes.

As it relates to Companies, the trouble with “Quality” is that it means many different things to many different people. In many ways Quality is in the eye of the beholder, and while its effects can be seen, it’s hard to measure.

Does the fact that a company increases dividends for 25 years mean that it’s a high quality company, and if so, what’s the magic number when the quality threshold is reached – 5, 10, 25 years? Is it cash flow, earnings growth, financial strength, profit margins, all of the above? Quality isn’t a simple value you can just plug into a stock screener in the search for quality.

Measuring dividend stock quality

For a quick initial yes/no litmus test on whether to investigate a stock further; Chowder’s approach and definition is simple:

“High Quality is defined as having superior financial strength. A company must have a 1 or 2 rating for Safety with Value Line, or a BBB+ rating or better with S&P. Both of these Financial Strength ratings indicate investment grade quality. … Anything that doesn’t meet the High Quality definition is considered speculation and managed differently within the portfolio.”

Companies have credit / investment ratings assigned to them, much as we have our own personal Credit Scores. Companies with low investment grades must pay higher expenses when borrowing money because they’re considered to have a higher risk of not paying their debt (aka defaulting) than highly graded companies. And you can imagine that there’s an army of people involved in researching and determining each company’s grade because of how much money is involved in that industry.

The S&P rating mentioned by Chowder is one agency; here’s a quick comparison of some credit ratings available on the web as well as the things I learned along the way.

S&P Investor Rating

You can obtain credit ratings for individual companies over at standardandpoors.com. You’ll be asked to create an account and supply email, password and name but it’s otherwise free and there are no charges. Their website is quite a pain to use because you have to pull each symbol individually however, and none of the screeners in my brokerage accounts allow this rating as a search criteria.

The S&P rating methodology grades companies from AAA (the highest), through AA, A, BBB, BB, B, CCC, CC and to R (in default). The symbols ‘+’ and ‘-‘ are used to denote positions with a rating e.g. AAA+ > AAA > AAA- > AA+.

Using Chowder’s definition, grades AAA+ through to BBB+ are investment grade companies and grades BBB through to CC- are speculative. Note that officially per the S&P rating, all BBB grades are investment quality not just BBB+.

Value Line

I didn’t try to get the Value Line ratings. The sign up process looked more complicated than at S&P and they seem very interested in promoting their newsletters and stock selection methodology so I stayed away…

Moodys

And went to Moodys instead which is a competitor to S&P. Their signup process is very similar to S&P’s (email, password and name) but I found their website better organized and it contained more information. It’s free to sign up and get basic ratings but there are charges for premium reports that detail the ratings and research on each individual company. I was still not able to find a list of stocks with a given credit rating, although their search tools are better than the S&P site.

Moodys’ rating methodology is more complicated than S&P’s with 25 different classifications. There’s the basic classification of Aaa (highest), then Aa, A, Baa, Ba, B, Caa, Ca and finally C (the lowest). Then within each rating (except for Aaa), there is an additional rating of 1, 2 or 3 showing the relative position within the rank. So Aaa > Aa1 > Aa2 > Aa3 > A1 > A2 > A3 > Baa1.

The grades of Aaa through to Baa3 are considered investment grade. Grades from Ba1 to Ca3 are speculative and C is in imminent danger of default.

Morningstar Credit Rating

Morningstar has their own credit rating score too. You can find it hidden on the “Bonds” tab of any individual stock quote page. Or you can view the entire list. This is a much easier system to work with than either S&P or Moodys, and is likewise freely available. One disadvantage here is that the coverage is not as high as with the previous two systems; I could not find scores for 6 companies that S&P and Moodys rated.

Morningstar’s scale is simpler though: AAA, AA, A, BBB, BB, B, CCC, CC and C. Any rating of BBB or higher is “Investment Grade” and ratings of BB through CC are considered more speculative grades. C is the rating that denotes imminent default on loan payments.

S&P Capital IQ Quality Rating

Finally I looked at S&P Capital IQ’s Quality Ranking score. S&P Capital IQ is related to the S&P Ratings service as they’re both owned by the same parent company – McGraw Hill. However Capital IQ is a more general investment data and analytics company competing with Bloomberg and Reuters.

The Capital IQ Quality Rating isn’t a standalone credit score; it rates growth and stability of earnings and dividends. This rating is not the same as the Capital IQ ‘star’ rating which is an aggregate of additional criteria. The Quality Ranking score is defined in a range from A+ (highest), A, A-, B+, B, B-, C+, C (lowest). Since it’s not a credit score, there’s not really a concept of Investment-Grade but the B+ score is considered “average”. So you could take either B+ or A- as a minimum threshold.

You can find the Quality Rating (and definition) on any S&P Capital IQ analysis report which are freely available via the Sharebuilder brokerage research tools and other brokerages. The Sharebuilder stock screener also includes this rating as a search criteria.

How do my stocks score?

I’ve normalized all the scores from the stocks in my portfolio to a common standard; using the Capital IQ scale as a baseline.

For Moodys, the conversion ignores the 1,2,3 classifier so I mapped Aaa=>A+, Aa*=>A, A*=>A-, Baa*=>B+, Ba*=>B, B*=>B-, etc.

For S&P, the conversion ignores the +/- classifier, e.g. AAA*=>A+, AA*=>A, A*=>A-, BBB*=>B+, BB*=>B and B*=>B- etc.

Finally for Morningstar, I used a similar scheme as the S&P conversion: AAA=>A+, AA=>A, A=>A-, BBB=>B+, BB=>B and B=>B- etc.

This yielded the following results for the stocks in my portfolio

Symbol Moodys S&P MorningStar Capital IQ
MSFT A+ A+ A+ A-
PFE A- A B+
T A- A- A- B+
ROC B B+ B
XOM A+ A+ A+ A
HD A- A- A- A
JNJ A+ A+ A+ A+
AXP A- B+ A- B+
PG A A A A+
UPS A A- A- B
CVX A A A A
MCD A- A- A A
JPM A- A- B+
KO A A A A+
INTC A- A- A B+
DOW B+ B+ B+ B-
AWR A- A- B
ADP A A A
UNP A- A- A- A+
KMB A- A- A- A
GXP B+ B+ B+ B
APD A- A- A- A
LNT A- A- B+
GIS A- B+ A- A
MAR B+ B+ B+ B+
RTN A- A- A- A+
TROW A-
LB B B+ B+
CB A A A- A
BMS B+ B+ B+
EMR A- A- A- A+
LMT B+ A- A- A+

Missing results

The Moodys and S&P Ratings are not always available for a given stock symbol. Here’s a quick run through the stocks in the list above where I couldn’t initially find a rating. Another place to find the rating can be the company’s Annual Report.

Rockwood Holdings (ROC)

ROC’s debt is issued by one of its fully owned Subsidiaries, Rockwood Specialties Group. Using the conversions above, this rates a normalized B for Moodys, or B+ from S&P.

American States Water (AWR)

AWR’s debt is mostly dependent on its subsidiary, Golden State Water Company (GSWC). This rates a normalized A- for Moodys and an A- from S&P.

T. Rowe Price (TROW)

TROW aren’t rated by S&P or Moodys simply because they have no debt!

Summary

While the Capital IQ ratings are by far the easiest to query and are readily available for every stock I’ve searched for; I think I’ll pay more attention to Moodys credit rating going forward. I think it’s more focused than the Capital IQ rating and since it can directly affect the cost of borrowing of a company, it’s a meaningful rating. I’m pleased to see that most of the stocks in my portfolio have a good credit rating though!

Based on Moodys scores, my two lowest quality stocks are ROC and LB although the news is not all bad. ROC is currently under watch for a possible upgrade after the announcement of the pending sale to Abermarle. LB was upgraded one step in 2011 due to strong performance and debt repayment, putting it in the top tier of its grade and the company currently has a stable outlook.

Bullion Vault

Investing in Gold Through a Bullion Vault

Some investors see the value of investing in gold, but simply don’t want to bother with the handling and storage requirements of investing in physical gold. In the past, many would move on to other investments or be pushed towards paper gold as a solution. Today, however, investors can have many of the features of both physical and paper with a bullion vault.
What is a bullion vault?
Bullion vaults are companies that specialize in providing their clients with remote, allocated gold storage coupled with access to professional markets. In the past this sort of turnkey service was only available to major institutions such as banks, mutual fund and ETF management firms, and metals dealers. Starting around the turn of the century, however, firms began to appear that brought this part of the market to individual investors.
Individuals always had options for storage itself, usually through the banks that would in turn deal with institutional bullion vaults, however that service was simply storage for the gold you brought to the bank or purchased through them in certificate form at a markup. Not only were they a middle-man but they didn’t provide the easy online trading and access to professional gold markets that you get with modern services.


How does a bullion vault work?
The major markets in gold are the professional exchanges in major financial centers, such as the London Bullion Market (not to be confused with the London Metal Exchange, which deals in metals futures). The size and market concentration in these exchanges provides buyers and sellers with high liquidity and low spreads in exactly the same way that large stock exchanges provide the same advantages to stock investors. The trouble individuals have in utilizing these exchanges is one of purchasing power.
Gold is traded in 400oz “Good Delivery” bars on these exchanges. These bars are produced according to strict specifications detailed by the London Bullion Market Association (LBMA) or a similar organization for other good delivery networks. All of the bars are cast in approved refineries that are monitored and regularly audited to ensure that the bars contain the precise amount of gold claimed. To maintain its good delivery status, a bar must then be stored in an LBMA-approved warehouse and never leave the LBMA system. Once a bar leaves the system it will need to be re-assayed before it can enter the system again.
The advantage of this system is that the bars can change ownership many times without having to be go through a very expensive full-melt assay (a complete recasting of the bar) to verify authenticity each time. With the assay costs minimized, the exchange can operate with very low transaction costs – basically only the cost of storage.
Individuals are largely unable to access these markets directly due to the extremely high values of the bars stored in the LBMA system. Unless you have hundreds of thousands of dollars dedicated to investing in gold you won’t be able to purchase a good delivery bar. A bullion vault fills this gap by acting as a middleman between the professional exchanges and individuals. In exchange for a small commission, the bullion vaults pool your investment with that of their other clients so that, on the back end, they can trade only in large, good delivery bars.
Advantages of bullion vaults
Bullion vaults have compelling advantages when compared to holding and storing your own physical gold. First and foremost is that you don’t hold and store your own physical gold. For some investors, especially those that already have a large enough emergency cache or have no good way to do so, this is a big draw. While we don’t recommend that you keep all of your gold in other locations, we likewise don’t recommend that you keep all of your gold in your home for security reasons. Bullion vaults make an excellent second or third storage location.
An additional draw, and definitely our favorite at Wise Gold Investing, is that the premiums are very low. The specifics vary depending on the bullion vault, but in most cases you are looking at a purchase premium of less than 1.5% over spot including the vault’s commission and a sale premium of less than 1% under spot including the vault’s commission. One thing to look out for is additional transaction costs. If a bank wire is required to deposit money into the vault system you may be paying $30-$50 per deposit, which is as much as 3% of the purchase price of a single ounce. If you think you will be depositing in smaller amounts you should look for a vault that has a no-fee way to get money into the system.
The last advantage of note is that it is real, physical allocated gold. It isn’t prone to the issues of paper gold. As a bailment contract with the bullion vault, the gold belongs to you and your investment will be protected even in the event of the dissolution of the vault company. As an added protection, most bullion vaults have your investment insured.
Disadvantages of bullion vaults
Our biggest complaint with bullion vaults is the difficulty or, in some cases, outright inability to take physical delivery of your gold. As these companies deal exclusively in large bars it is difficult for them to provide conversion services for. Fortunately, some vaults are taking note of this issue and allowing clients to convert to good delivery silver for physical delivery. This will incur an additional fee, so before using bullion vaults with the plan of eventually taking physical delivery you should add up the fees to see if you wouldn’t be better off just purchasing physical in the first place.
Another issue for some looking at investing in gold is the lack of immediate access to your bullion. If security in the event of disaster is an issue then you will want to make sure you are happy with the amount of physical gold you hold locally before taking advantage of the benefits bullion vaults provide. After all, in an emergency a pile of gold sitting in Zurich isn’t of much value.
Bullion Vault: Wise Gold Investing or Not?
Wise Gold Investing is all about maximizing your returns while still investing in gold through means that meet your ultimate goals. Properly used, bullion vaults provide excellent value to the gold investor. As long as you don’t plan on taking personal delivery of the product they can provide the lowest transaction fees of all forms of physical gold while maintaining a phenomenal level of security. Utilizing a bullion vault is definitely something that should be seriously considered by anyone investing in gold.

money-ideas

The Best Dividend Stock Screens

My Favourite Dividend Screens

Finding great businesses isn’t easy. With over a thousand businesses alone listed on the Australian Stock Exchange (and multiples more internationally), finding the diamonds in the rough can be difficult, time-consuming and overwhelming. Today, I’ll show you two quick methods to find companies that in my opinion provide a great starting point to finding dividend stocks that will deliver you attractive long term returns.

Stock Screening – the diamonds in the rough

Stock screening is the process of sorting a list of companies by some financial criteria. By using any number of online tools, we can take a universe of stocks and rank them on this criteria from best to worst. Two of the most commonly used company screens are Price to book value and Price to earnings; these are the two gold standards for screening for “value” stocks. Other common stock screening methods include sorting by market capitalisation (in order to separate smaller companies from larger companies) and growth-focused screens such as screening for return on equity and earnings per share growth rates. An excellent book that describes various stock screens and the subsequent investment results of these screens is “What Works on Wall Street” by James O’Shaughnessy – a true classic in using screening methods to build market beating portfolios.

My favourite Stock Screens.

I have two stock screens that I use to find excellent businesses. The first is filtering by volatility and looking for low volatility stocks. Low volatility stocks have a long history of outperforming market averages – this is known as the low volatility anomaly and has been discussed in a number of academic journals. Low volatility stocks have performed exceptionally well over the last three or so years, and as a result, the amount of investment dollars (particularly in the USA) that has flowed into low volatility products has been extremely high. The demand has been so strong in fact that investment firms have rolled out over 20 different “low-vol” stock funds and exchanged traded funds since the end of 2015! The largest such ETF is  the iShares MSCI USA Minimum Volatility ETF (USMV), which has a whopping US$14.1b invested in it! Unfortunately, there is some evidence that enthusiasm for these products has driven prices for low volatility assets to historical highs, which anecdotally is certainly the case in Australia as well. Nonetheless, this screen can be great for finding business to place on your watchlist, so you are ready to pounce should the price of the company fall to more reasonable levels!

dollar_bills

Currently, the lowest volatility quintile of the ASX300 are as follows:

CMWCromwell PropNVTNavitas Limited
TCLTransurban GroupSYDSYD Airport
DUEDuet GroupTAHTABCORP Holdings Ltd
CQRCharter Hall RetailDXSDexus Property Group
BKWBrickworks LimitedBXBBrambles Limited
SCGScentre GrpCBACommonwealth Bank.
GOZGrowthpoint PropertySGRThe Star Ent Grp
AGLAGL Energy Limited.FPHFisher & Paykel H.
TLSTelstra Corporation.RHCRamsay Health Care
SGPStocklandARBARB Corporation.
GPTGPT GroupSKISpark Infrastructure
DLXDuluxgroup LimitedIVCInvoCare Limited
IOFInvesta Office FundAOGAveo Group
ASXASX LimitedABCAdelaide Brighton
CSLCSL LimitedAMPAMP Limited
ASTAusNet Services LtdCCLCoca-Cola Amatil
APAAPA GroupSUNSuncorp Group Ltd
WFDWestfield CorpREAREA Group
WESWesfarmers LimitedIAGInsurance Australia
RMDResMed Inc.SKCSkycity Ent Grp Ltd
BWPBWP TrustBLDBoral Limited
CHCCharter Hall GroupGNCGrainCorp Limited
SCPSCA Property GroupNABNational Aust. Bank
GMGGoodman GroupAMCAmcor Limited
MGRMirvac GroupAHGAutomotive Holdings.
VCXVicinity CentresWBCWestpac Banking Corp
TTSTatts Group LtdTPMTPG Telecom Limited
ABPAbacus Property Grp.SAISAI Global Limited
FBUFletcher BuildingPPTPerpetual Limited
CARCarsales.Com Ltd.HSOHealthscope Limited

Obviously there are a number property trusts in the list, and these require special analysis which I will discuss in the future. Of particular interest in my opinion are industrial stocks; that is, everything other than resources and property trusts. The above list can be a great starting point for further research.

The other screen I love to use is very similar, and often there is a large percentage of overlap between the two. The next screen I use is a low-beta screen. Beta is a finance term which is reasonably technical, but a basic explanation is that a company with a beta less than 1 is less volatile than the broader market. Therefore, we again look for low betas as potential interesting opportunities. The top 60 of this screen are below as well.

RMDResMed Inc.SGPStockland
SKCSkycity Ent Grp LtdFBUFletcher Building
FPHFisher & Paykel H.SCGScentre Grp
ACXAconex LimitedTPMTPG Telecom Limited
DUEDuet GroupWFDWestfield Corp
IPHIPH LimitedAZJAurizon Holdings Ltd
SPKSpark New ZealandJBHJB Hi-Fi Limited
TMETrade Me GroupASTAusNet Services Ltd
PRGProgrammedAHYAsaleo Care Limited
GOZGrowthpoint PropertySYDSYD Airport
GNCGrainCorp LimitedTLSTelstra Corporation.
TCLTransurban GroupCCLCoca-Cola Amatil
APOApn Outdoor GrpSGRThe Star Ent Grp
SKISpark InfrastructurePGHPact Group Hldgs Ltd
BKWBrickworks LimitedGTYGateway Lifestyle
CMWCromwell PropDLXDuluxgroup Limited
CCPCredit Corp GroupMGRMirvac Group
ANNAnsell LimitedVOCVocus Comms Ltd
APIAustralian Pharm.PRYPrimary Health Care
ECXEclipx Group LtdCOHCochlear Limited
SAISAI Global LimitedCVOCover-More Grp Ltd
IOFInvesta Office FundBWPBWP Trust
HSOHealthscope LimitedCPUComputershare Ltd
TAHTABCORP Holdings LtdSCPSCA Property Group
ALUAltium LimitedGPTGPT Group
AGLAGL Energy Limited.SHLSonic Healthcare
CARCarsales.Com Ltd.MQAMacq Atlas Roads Grp
QANQantas AirwaysSKTSky Network
CQRCharter Hall RetailEHEEstia Health Ltd
CSLCSL LimitedNSRNational Storage

As you can see, there is some overlap between the two. Again, these can be great places to find quality companies with the potential to pay strong and growing dividend streams.

Why not just use Dividend Screens?

The reason I start with other screens is that I am far more interested in owning businesses with strong financial characteristics and strong prospects than companies with the largest yields. As I have written about before, stocks with lower than average volatility and low betas have historically performed well. My concern with screening by yield is that it can result in a list of companies with extremely high yields but impaired business outlooks. While I am primarily looking for dividend growth companies, I would prefer companies with slightly lower yields but with the ability to grow those yields over time.

Stock Screening Warnings.

Stock screens are great for coming up with a list of companies deserving of further investigation. I implore you not to just use the top 10% or top 20% as a portfolio. Blind buying of companies rarely works out for individual investors. Again, I would suggest you use these screens as a starting point for further research.

In addition, stock screens only screen for quantitative factors. Other factors, such as the quality of the management team and the outlook for the broader industry cannot be screened for (at least, as far as I am aware). These qualitative factors are an important part of the investment research process.

Lastly, when using stock screeners you should make the effort to understand where the data is coming from and how relevant it is. Fortunately, I have access to some institutional level tools which enables me to be confident in both the quality and timeliness of my data. Make sure the tools you use are up to date and accurate!

Conclusion:

Stock screens can enable an investor to quickly and efficiently find quality companies deserving of further investigation. I would encourage everyone to explore stock screening as a valuable way to find new investment ideas. For those of you who are concerned about data issues, I update my screens quarterly, and you can find them here. As I said, these are the primary way that I find new and interesting companies for further research.

Do you use stock screening? What are you favourite stock screens? Let me know in the comments!

distributing

Taking Advantage of Stocks Distributing Dividends

“Your Choice Determines Your Destiny!”

Few days ago, I got a request from one of the reader of this site. Here’s the screen shot of his request:

Before going into the details on How to Play the Dividends, here are the definitions that you need to know. More explanation can be read in my previous blog.

  • Declaration Date – Board of Directors announces the payment of Dividend
  • Ex-Dividend Date – The Stock starts to trade without the dividend
  • Record Date – Current shareholders on the record book will receive the dividend
  • Payment Date – Company issue the dividend payments

The dividend timeline below illustrates the four dates investors(traders) must understand and monitor in order to effectively implement their dividend play strategies.

Figure 1. Dividend Timeline

Maybe, you are already aware that dividends are one of the many factors that influence the stock price, though not really a big impact compared to other variables such as company earnings, arbitration’s issue like what happened recently with MWC and MPI.

In this article, I’m going to take a look on the common ways to trade around the dividends.

 

PHILIPPINE STOCK DIVIDEND HISTORY

As a Dividend Investor, Most of the time I am looking into stocks known as blue chips since these stocks are considered stable. I reviewed my database and filter the stocks that distributes dividends for the last five years, below is the top 5 blue chips dividend stocks ranked base on the dividend yield.

RANKSTOCKLAST PRICE YR2009TOTAL DIVIDEND YR2010 – 2014DIVIDEND YIELDLAST PRICE YR2014PRICE %CH YR2009-2014TOTAL RETURN
1DMC          1.94      8.5000438.14%        15.70709.28%1147.42%
2SCC        18.33    52.0000283.64%     142.00674.55%958.18%
3AEV          9.00      7.480083.11%        52.70485.56%568.67%
4AP          8.60      4.940057.44%        42.90398.84%456.28%
5URC        16.25      8.280050.95%     196.001106.15%1157.11%

The following screen shots shows the stock prices movement around the dividend dates:

AEV

AP

DMC

SCC

URC

Dividends coin

ACCUMULATE BEFORE THE DECLARATION DATE

It seems the idea of accumulating before the declaration date is good. If you notice, almost all of the five stocks shown above, the stock price started increasing prior to the declaration date. For Dividend Investor this may not really matter. I will elaborate this further in my future post. For Short term trader taking advantage of the upcoming dividend, this strategy might be good to implement. However, two important things is a MUST to be known. First, The expected Dividend distribution month MUST be known so you can schedule the timing when you will start accumulating. I have a compilation of this anyway to help you shorten your time of your research, just check the DIVIDEND CALENDAR page of this site. Secondly, You MUST be aware of the previous quarter earnings of the stocks of your interest. You have to ensure that the company has a positive earnings otherwise the probability of distributing dividends is very less.

 

BUY ON DECLARATION DAY

Most of the time, the stock price rises from the declaration day up to the day prior to Ex-dividend date. For short term trader taking advantage of the upcoming dividend, this day may be the BEST time to enter. However, not all stocks rises as shown in the screen shots above.

 

SELL ON OR BEFORE THE EX-DATE

For short term trader, selling before the Ex-Date is always preferred as long as the profit is almost equal or more than the dividend yield since on the Ex-Date, stock price will most likely drops to almost same amount of the dividend. Let’s take a look on DMC. On May 16, 2014, DMC declares a dividend with a 4.11% yield. Let’s assume you bought a shares of DMC during closing on May 16, 2014. On May 20, 2014 (two trading days after dividend was declared), the stock price raises as high as 7.68% from May 16 closing. During this time, you may consider to SELL your position reaping a 7.68% return better than the 4.11% return from the dividend. However, If you really wanted to collect the dividend income but not planning to hold the stock for a long time, you may SELL on the Ex-Date (most likely with a loss but dividend income may compensate this loss anyway). If you could wait a little longer, I recommend to SELL your stocks few days (or weeks) after the Ex-date since the stock price will recover from a loss due to the dividends (you may check again the screen shots above and observe how the stock price recovers after the Ex-date).

CONCLUSION

Not all stocks have the same behavior/reaction to dividends. Nonetheless better to know how the particular stock perform on the dividends and respond accordingly. I recommend that you MUST have always a trading (or investing) plan before you execute in any of your future trading(or investing) decision and stick to the plan all the time. In this way, it is easy to modify and trace what went wrong or which one needs to be improved. Remember, it is your hard earned money. So, be responsible on all your actions.

Thank you for reading. May you have a consistent and profitable trades ahead!

Gold Coins

Gold Coins and Gold Bullion Remain a Safe Place For Your Money

The Bull and The Bear are continuing to bang heads. Wall Street and even Main Street USA, and I am sure even your street is in shambles. The banking system is melting before our eyes and is in total chaos. The bankers, all the smart players are demanding a bailout. They have ripped us off, lined their pockets and are smoking a big cigar bought with their fat wallets and they want help! The only bailout plan should be the bankers getting bailed out of jail for this mess, the mess that has almost crippled our economy and the mess that they have put us into. So as we sit around wondering what’s next, now we need to ask ourselves… Are there any safe places to put your money in this time of the weak Dollar, while all of the financial lenders go belly up, with the oil market a ticking time bomb, with wild fluctuations in the stock market? There is hope for that safe haven. You need to follow this advise, you need to act now, this is not a doom and gloom scare tactic, it is simple real life mathematics. We say park your cash in: gold. Yes Gold! Whether it is coins, bullions, or Kruggerands, gold has historically been a safe haven for your hard earned cash. That is not about to change any time soon, if ever.

The California Gold rush is a well documented example of how far back gold has been popular. In fact, we can go back thousands of years to trace the investment lineage of gold. Gold has historically and will continue to be a solid investment! Think about this, gold is an item you can hold in your hand, that alone is a main reason why it is so valuable. It is an item you can hold, wear around your neck or store in a safe. It’s not an abstract number in a computer bank that rises or lowers by market movers who have no clue. It’s not spat out by a magic money tree in the basement the Federal Reserve. It is produced by mother earth and all her wonderful resources. Gold, to this day has to be mined by gold miners and separated from the earth. Gold is virtually impossible to become worthless, along with silver it is what all paper and minted money is supposed to be backed by in all countries around the globe. Everywhere you can think of, world economies depend on the price of gold, and more importantly the economies need the value of it to be maintained in a positive manner.

gold-coins

The history of our economy has always been whenever derivative money such as the Dollar have shown times of volatility, causing stocks and bonds to go on a wild ride, that is when most seasoned and wise investors have turned to gold and precious metals as a place to not only invest but to protect their hard earned precious wealth. Way back when gold was first discovered, gold has always been the rock upon which all currency and wealth is built upon. Stocks, bonds, oil, pork bellies, orange juice futures and other commodities, can collapse any day, gold will never collapse. The original money known to mankind is, that’s right gold. You can wake up one morning, or return from work one day and in an instant The Dollar can become worthless on the FOREX, but gold will never lose any of its value. If the Dollar were to become worthless, then investors would be pushing up the value of gold, driving the price to historic levels, and investing much more of their money in it! That will be an all time Gold Rush, and your pockets will be lined with golden dollar signs.

Now, I do not want to get your hopes up, in fact the Dollar going to zero is not a realistic scenario. But now that we have your attention we are just exaggerating to make a point–a very realistic point that gold as an investment really has some true merit. Gold coins and gold bullion have been magnificent investments for a long period of time. We do not see this changing and the more troubled times that occur in the speculative stocks and bond markets, thanks to a few greedy people, the better gold coins and bullion become as investment vessels. Gold will always remain a smart investment choice, perhaps one of the few, safe outstanding plays for a college fund. If college is still greater than 15 years out, then a play on gold, may in fact be a safe haven for a few of those “golden” eggs. In other words get into gold when your child is born and just tuck it away for the first college day.

Now, let’s look at what may not be fun to review, but is probably a good time to discuss the facts, and that is a few hard economic realities. First things first, the value of gold and the other precious metals, always reflects global inflation. Inflation is caused by the increased circulation of derivative or fiat monies. Inflation, even if it were to slow down now (very, very unlikely), is a hard reality of modern economics; thus, the value of gold will continue to rise. All the precious metals will continue to see an increase over the next decade and beyond.

For another thing, does it seem to you that geopolitical uncertainties are going do just vanish anytime soon? Yea, OK! There are way too many world leaders that have an agenda that is self centered and dangerous. Turmoil amongst world leaders is only going to worsen over the next few years. The world, especially some of its world leaders is crazy with greed. There are more than enough of crazy “leaders” in the world, plenty of people who will kill you for their fanatical cause, will keep the price of gold at all time highs. As the planet generally grows wealthier, while on the one hand that gives more opportunities for more people to do well, it also provides more opportunities for people to do wicked things. World financial markets, regardless of the country do not like the risk with this political chaos. These are threats to world economies and to the wealth of these world leaders. And yet, the smart and wise investors continue, year after year to profit from this kind of risk. And they know that perhaps the very best way to profit from risk is investing in gold and other precious metals. When markets grow more destabilized, which seems to be happening most of the time, the price of gold and precious metals goes up, because people around the world value it more.

There is always risk to the stocks and bond market anyway. No different than betting on some sports action in Vegas or a long shot at the races, the larger the risk or odds, the greater the return Smart investors and wise gamblers know that greater risk taking, if done right, leads to greater profits and earnings. But, those bigger profits are also less certain profits. Yet with gold, the riskiness has a very strong and historically proven tendency to drive up the value of the precious metal. So it can be said that with gold investments, greater risk basically GUARANTEES greater profits!

Remember, whenever the markets experience some turmoil, people start placing their money into more solid things. People want to be able to sleep comfortably at night; they need the comfort that their nest eggs are protected. They want less speculation, less derivation, and more concrete stuff. When stocks and mutual funds are reeling, gold coins and gold bullion are rising. For they are the stuff and the foundation that economies are made of and provide the true value that investors seek. Beginning today you should start building your core foundation of gold coins and gold bullion investments.

dollar

Why Invest in Dividend Stocks?

I realized that it is necessary to write about the reasons behind why I choose to invest in dividend stocks as my strategy in building wealth. Though, Dividend Investing is more popular in the United States, I am optimistic that this strategy will equally work-profitably in the Philippine Stock Market. Does anyone of you doing dividend investing strategy? I hope we can discuss our experiences here as we go along our journey towards financial freedom.

As an Overseas Filipino Worker (OFW), one of my goal is to build up my wealth as soon as possible. When I say wealth, it’s not simply about having a lot of assets, it’s about generating a significant amount of passive income that grows over time.

Putting Up a Business

I believe putting up a business is one way, if not, the best way to build our wealth. Indeed, I had put up three small businesses so far. Two of these are giving me an ample amount of passive income while the other one I decided to stop its operation due to the incompetence of the manager I hired.

With the closure of my third business and a timely introduction to me of the stock market, I realize that stock market could be a good business as well. Buying a share of stock in a company has no difference from what I have been doing in my businesses since I hire other people to manage the business that I put up for I am still working outside the Philippines (so I can be well capitalized).

 Stock Market as my new Business venture

I got motivated with the idea that once you bought a share of stock in a certain company, you are then a part OWNER of that company. Wow! I can own many businesses while I’m still an OFW. The challenge now is to define what strategy to implement before investing in the stock market?

EXPENSIVE-MONEY

Investment Strategy

Investing strategy depends on the type of the investor. In the Philippines, I often heard of the following strategies:

  • Buy and Hold. Buy and hold strategy involves buying company shares and hold them for a long time.
  • Peso Cost Averaging. The peso cost averaging strategy is designed to reduce the risk of suffering substantial losses resulted when the stock was bought just before the market falls.
  • Value Investing. The value investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued.
  • Market Timing. Market timing is usually used by the day traders (active traders) attempting to maximize their return.
  • Dividend Investing. Buying a Dividend Stock and holding while continually getting a dividend income.

So, Why Dividend Investing?

I am not against with any of the strategies mentioned above. In fact, I want to use them all. Yes, TO USE THEM ALL. I will incorporate the first four listed strategies above into the Dividend Investing. Why? Simply to ultra-maximize my return (wishful thinking).

Though, I’m still in the process of building up my Dividend Portfolio nevertheless I sense comfort with Dividend Investing, in a way that I don’t really need to put most of my time monitoring the ups and downs of the stock market price. In fact, I can’t monitor all the time during trading hours due to my 12-hours daily job (pardon, not really everyday – my work cycle is 4 Days work/4 Days Off). Monitoring the market action after the trading hours is not an issue in dividend investing.

My previous blogpost, a comparison of return between Dividend Stocks versus non-dividend stocks, shows how the dividend stocks leads in reaping the returns. Even, one stock reaps an overwhelming 1,600% return, wonderful, right? But then again just a reminder that this will not guarantee for the future performance. A detailed study is a MUST before you invest your hard earned money.

Another thing that I like in Dividend Investing is that, aside from price appreciation, the dividend income that you’re collecting can be re-invested hence, that will give you a passive income that grows exponentially each year and at the same time builds your net worth over the long term.

Security during Market Lows

As we all aware, stock market price is moving like a roller coaster. Everybody is happy when the price move upwards but many would panic whenever the price declines. The movement in price doesn’t affect much the dividend investor knowing we still get dividends and even have the opportunity to buy more shares when the price is low, Peso cost averaging and Market Timing strategies applies here. However, we MUST dutifully check the value of the stocks we’re holding to ensure that the stock value still holds to be favorable – here you will apply the Value Investing Strategy.

CONCLUSION

Apparently, the dividend investing strategy takes time and discipline. I would say, patience and perseverance is the key to success in dividend investing. Further, we need to develop a robust investing plan. We need to identify companies that will provide good earnings over time.

Some time ago, I read from one of the blogger (unfortunately, I forgot to take note of his blogsite 🙁 ) sharing his views in finding a good dividend growth stock for your portfolio. The following is what his general principles that are worth looking for when investing in dividends:

  • A good dividend growth company has a product or service that you can foresee existing and being relevant for many decades to come. Time is very important to allow passive income to increase, so it’s wise to find a company that is built to last forever.
  • The company should have unique aspects that separate it from competitors.
  • A strong balance sheet is the hallmark of a good dividend investment, because it increases the chances of your company being able to survive and grow.
  • Keep in mind the general estimation that the total rate of return will be equal to the dividend yield plus the sustained dividend growth rate. Some investors like high-yielding stocks with lower dividend growth while others like lower-yielding stocks with higher dividend growth, and some prefer a mix of both, but keep this basic guideline in mind.
  • The company’s stock should be reasonably priced. A good company can make a bad stock if it is over-priced relative to its fundamental value. If you buy stock in an overvalued company, your returns are likely to be less than the sum of dividend yield and dividend growth. If, instead, you buy quality undervalued companies, your returns may be greater than the sum of dividend yield and dividend growth.
  • You should be able to understand the company. My view of investing is about individuals taking control of their finances, so if they don’t really understand their stocks, they aren’t really taking control of their finances.

How is the idea of investing in dividends to you? Does it sounds more profitable, easy, and hassle-free strategy?

Thank you for reading and looking forward for our success in all our endeavor!

dargs-ediens

The Rise and Fall of Dividend Champions

How many companies have tried and failed to become a Dividend Champion with 25+ years of annual dividend growth? How many of the former Champions are back in the running for another try at Dividend Championship?

Read on for some stats on the rise and fall of Dividend Champions since 2007.

The excellent US Dividend Champions list has been maintained by David Fish since 2007. The list contains a detailed “Summary” tab showing the evolution of companies in the list from year to year; however it’s not entirely accurate because the earlier lists from 2007 do not contain all of the companies showing as Champions today.

I compiled all of the lists from the Dividend Champion list archives together so I could see the complete evolution of all companies from December 2007 through to December 2015. To compile the list I started with the 2015 list and subtracted one year in each company’s history until 2007, then I added the companies that were eliminated in each year and back-tracked their history as necessary.

You can download the Excel File here.

I’ve shown the first three lines from the report as an example; it contains the symbol / company name and then the dividend growth length (in years) as a number for each year from 2007 to 2015. The 2015 column matches the December 2015 list; earlier years might not match up exactly with earlier lists because I’ve extended the data backwards.

So-Expensive

Empty cells indicates either no dividend was paid or that the dividend growth was less than 5 years. You can infer when companies started paying dividends e.g. Agilent started paying a dividend in 2010 and grew it each year until 2015 when it reached a 5-year history and is first shown on the list.

SymbolNameIndustry200720082009201020112012201320142015
AAgilent Technologies Inc.Medical Equipment        5
AANAaron’s Inc.Retail-Rental5678910111213
AATAmerican Assets Trust Inc.REIT-Retail        5

The Fall of Dividend Champions

There are many reasons why dividend champions are removed from the Dividend Champions list. Poor performance is just one; it could be because the company was taken private or merged with another company. It could also be that the company decided to expand or grow the company instead of paying out the dividend. And a pause in an annual increase will remove a company from the list. I’ve not researched the reasons why; I was mostly interested in the rate of decline of existing dividend champions.

Here’s a table showing how the companies in 2007 with 5+ years of dividend growth have fared in the subsequent 8 years until 2015.

# Years200720082009201020112012201320142015
50+888888877
45181817151515151414
40343330272727272626
35716657545351515050
3011110281787573727169
2514212799949189878583
20165150120114111108106104102
15194179149143138133130128125
10252237207201189185182179174
5379364334328311298286279266

The data is cumulative; that is there were 379 companies with 5+ years of dividend growth in 2007 and 252 companies with 10+ years. In 2008 there were 364 companies remaining from the original 379. This means that between 2008 and 2007, fifteen companies failed to increase dividends and were removed (379-364 = 15), and that in 2007 there were 127 companies with a 5-9 year history (379 – 252 = 127).

I’ve plotted this table out in the chart below.

This chart shows both the effect of the 2007-2008 financial crisis with a large drop in dividend increases in that period. In general, companies with a long history show a much lower failure rate than companies with a shorter history.

Past performance won’t apply going forward, but this kind of information might help determine the allocation of stocks between companies with long and short histories. A stock portfolio containing twenty companies with a 5-year history might expect to lose about 6 companies (28%) in an 8-year period with a corresponding reduction (or freeze) in dividend increases.

Using the numbers above that’s (266-174) / (379-252) = 92/127 = 72% remaining. The table below shows all ranges.

Start Length20072015Survival %
5-91279272%
10-14584984%
15-19292379%
20-24231983%
25-29311445%
30-34401948%
35-39372465%
40-44161275%
45-4910770%
50+8788%

The law of small numbers increasingly distorts the results since a single company dropping out has a much more significant effect when there’s only 8 to start with compared to 127.

Rising from the ashes

The following former Dividend Champions from 2007 are back in the 2015 list with a 5 or 6 year Dividend History. Their former status might mean they’re above average compared to other 5-year growth companies.

SymbolCompany Name20072015Sector
AVYAvery Dennison Corp.315Business Equipment
BBTBB&T Corp. 36 5Banking
BUDAnheuser-Busch InBev SA/NV 31 6Beverages-Alcoholic
FITBFifth Third Bancorp 33 5Banking
GEGeneral Electric Co. 31 5Conglomerate
HSYHershey Company 32 6Confectioners
JCIJohnson Controls Inc. 32 6Auto Parts
KEYKeyCorp 43 5Banking
LMLegg Mason Inc. 26 5Financial Services
LNCLincoln National Corp. 25 6Insurance
PFEPfizer Inc. 41 6Drugs
STTState Street Corp. 26 5Banking
UDRUDR Inc. 30 5REIT-Residential
USBU.S. Bancorp 355Banking

Survivorship Bias

The Dividend Champions List is a no-nonsense list; if a company cuts its dividend it’s out; there’s no special treatment for 50-year Champions despite their pedigree. For the most part, this is a good thing since only the strongest companies survive which is a desirable trait for companies in a dividend growth portfolio. But Survivorship bias can creep into comparisons so keep that in mind when comparing numbers.

As a case in point, in the 2015 Dividend Champions list there are 13 Financial companies, 14 Utilities and 5 Health care companies which have a 33+ year dividend growth length. So you might look at those numbers and think that Financial companies and Utilities are both great sectors for dividend champions and Health Care is quite weak.

However if you wind the clock back to 2007 and look at companies back then that had a 25-year Dividend Growth history (which is 33 years now), your conclusion might be quite different.

Industry2007 (25-Year History)2015 (33-Year History) Survival %
Health Care191473.4%
Utilities8562.5%
Financial441329.5%

Less than one-third of the 25-year Dividend Champions from the Financial sector in 2007 managed to continue to increase dividends over the next eight years, compared to nearly three-quarters of the Health-care companies. This time period includes the Financial crisis where Financial companies were heavily impacted, but the high numbers of Financial companies in the 2015 list are simply because there were more financial companies to start with. And another financial crisis is perhaps more likely than a crisis in the Utilities sector in the future.

Even this conclusion has its bias since it only counts companies with 25+ years and not the total number of dividend paying companies.

Summary

I don’t think too much weight should be put on the percentages in this summary; the set of numbers are too small. But it was an interesting exercise to see the kind of failure rates that might be expected over a long investing cycle, especially for investors who have a 40-year investing period ahead of them.

Re-visiting former champions that have recovered from their prior cut or freeze is an interesting topic too. Of course they cut their dividend in the first place but further research might indicate if they deserve a second chance or not.

And in case you’re wondering, the solitary Dividend Champion with 60-years of dividend growth which was removed from the Dividend Champions list in the 2007-2015 period was Diebold Inc (DBD) due to a dividend freeze in 2014. It’s still paying dividends with a 4.3% yield but the Champion’s List has no mercy.

Quote of the day

Choose a job you love, and you will never have to work a day in your life.

dividend

A Guide to Finding the Best Dividend Growth Stock

Choosing the best dividend growth stock involves a lot more than looking at a company’s dividend payment history. There are several other things to consider before you can find the best one. In this article, we will show you how to successfully find high growth dividend stocks to invest in.

But first, let’s talk about what dividend growth stocks are.

Dividend growth stocks ― what are they?

Let’s begin by saying that dividend growth stocks are companies that increase their dividends paid on a frequent basis.

dividend stocks

The unwritten rule is that any company can be considered a dividend growth stock if it consistently raises its dividend payouts at least once a year.

Some companies raise the dividend payouts on a quarterly basis. Others do so on a yearly basis.

Main categories of dividend growth stocks

Another important thing you should know is that there are several dividend growth stock categories.

Ultimately, there is no established definition for each of the following categories. Before we explain each one, it’s important to remember that you shouldn’t focus solely on the company’s past performance. There are other factors you need to consider before coming to a decision.

  • Challengers are stocks that have raised dividends during the past 9 years.
  • Contenders are stocks that have raised dividends during the past 10–24 years in a consistent manner.
  • Dividend Champions are stocks that have been consistently raising dividends during the past 25 years.
  • Dividend aristocrats are the same as dividend champions. Additionally, aristocrats need to have their stocks listed on the S&P 500.
  • Dividend kings are companies that have been consistently raising their dividends during the past 50 years.

Dividend payout ratio

A dividend payout ratio is basically an indication of the amount of money that a company is giving back to its investors against the amount it’s keeping to pay off debt, reinvest, or add to retained earnings.
Dividend Stocks Income

How to calculate the dividend payout ratio

In order to calculate the dividend payout ratio, you need to divide the dividends by net income (dividends/net income)

You can find out a lot about a company with this formula. For example, you can determine the sustainability of a dividend. Any company that pays a high percentage of dividends won’t be able to keep it up for long.

A payout ratio of 100% isn’t sustainable. Basically, a 100% payout ratio means that the company is returning more money than it’s earning.

This payout ratio should be used when you’re in a dilemma about whether you want to invest in a profitable company that pays dividends or a company that has a high growth potential.

Finding a high dividend growth stock

Now that you know what a dividend growth stock is and how to calculate the dividend payout ratio, it’s time to find a stock worth investing in.

stock market

First of all, you need to take a look at some stocks that are paying out dividends and view their payout ratio. Look for companies with a 30% payout ratio and lower. Why? Because this percentage shows that these companies have a significant amount of leftover cash that they can use to fund their other objectives. Furthermore, anything up to a 50% payout ratio is acceptable.

Next, look at the credit rating of each company. See which companies have the best investment grade ratings. The credit rating is important because any company that wishes to borrow money in the future needs to have a good investment grade rating.

Keep in mind that a new company that wants to expand and develop new products is allowed to have a 0% payout ratio. However, an older, more established company with a sizable cash flow isn’t allowed this luxury.

The conclusion

Hopefully, this article has cleared up any questions you may have had about the dividend growth stocks.

If you want to find a high growth stock, start by viewing the dividend aristocrats and champions and go from there.

All in all, if you want to successfully invest in high growth dividend stock, you need to be patient and completely subjective. Remember that dividends are industry-specific, which means that the payouts are different.

dollar-banknote

Top 10 Reasons I Like Dividend Growth Stocks

I believe dividend growth investing is one of the best investment strategies available. There are many reasons I like dividend growth companies and today I wanted to highlight some of what I feel to be the biggest draws towards dividend growth stocks compared to other investment options. Here you’ll find my top 10 reasons that dividend growth stocks are my favorite type of investment.

Dividend growth companies tend to be great businesses.   Companies who have demonstrated the ability to increase dividends year after year for quite a few years (minimum of 5) are doing something right.  Look at many lists of dividend growth stocks and you’ll find many blue chip, solid industry leading companies who have been not only increasing dividend payments but earnings for many years in a row.
Income from dividend growth stocks can outpace inflation.  When looking for stocks to invest in I look for stocks that have a reputation for annually increasing their dividend payment at a rate higher than inflation.  This means that when I am living off of my dividend income, that income will at least keep pace with inflation.  As my expenses rise due to inflation, so will my income causing me no concern about being able to cover my bills.
Dividends can have a compounding effect on your wealth.  During the accumulation phase of investing I am using my dividend income to buy more shares of dividend growth companies.  As time passes I will be receiving dividend payments on shares that I purchased with previously earned dividends.  In effect I will be earning dividends on my dividends.  This is compounding and nothing can boost your wealth over time like the effect of compounding income.
Dividend income can pay my bills.  Eventually I will reach my goal of earning enough dividend income to cover my daily living expenses.  At this point I can choose to collect my dividend payments in cash rather than reinvesting them.  I can then use that cash to pay all of my bills and I will no longer have to go to a job in order to earn money.  When you don’t need to rely on a job to earn money to pay your bills, but instead can afford to cover those expenses with dividend income, this is what I call financial freedom.  Dividend growth can help me reach financial freedom.

Growth Stocks


Dividend income keeps me from making stupid mistakes.  There is a lot of volatility in the stock market.  Prices will go up sometimes and prices will go down.  As an owner of stocks you must be willing to sometimes experience large price declines.  When stock prices are dropping it is easy to think that you need to sell your stocks before you have nothing left.  However, if your main focus is on dividend income then this can give you a pause.  Dividend income can help you get through the hard times when you might be tempted to sell.  As long as the underlying business of the stock you own is still good and strong there is no reason to sell just because it may fall slightly out of favor with the market.
Don’t have to sell off assets (shares of stock) in order to generate cash.  If you own investments that don’t pay out an income then in order to pull out cash to pay your expenses you will need to sell some of those investments.  Dividend income allows me to continue to own my stocks while still paying me an income to meet my expense requirements.  I will never have to sell my stocks if I don’t want to.
Dividend growth is a positive sign from a companies management.  Typically if management is raising a dividend rate it is because they feel good about the future prospects of the company.  They believe they will have the profits to support a higher dividend payout.  The last thing management wants to do is have to decrease the dividend because this will negatively affect the stock price.  I believe most managements are conservative with their dividend increases so they will not be forced to have a cut in the future.  However, this is not always the case.  Make sure you do your due diligence as to the safety of the dividend before investing.
Dividends continue to grow even during recession or stock price declines.  There are companies out there that have increased their dividend for 20, 30 and even 50 years or more.  They continued to grow their dividends right through the bear markets of the 80′s, right through the bursting of the dot com bubble and right on through the recent financial crisis caused by the housing bubble.  Owning shares of companies who are able to continue to do well through recessions, despite what stock prices may be, makes me very pleased.  You can feel good that your companies are doing their jobs and the stock price will recover once the economy gets back on track.
Dividends are taxed at low rate for most taxpayers.  In the United States, qualified dividends are taxed at a lower tax rate than the regular income tax rates.  This means I get to keep more of each dollar of my dividend income compared to earned wages and interest.  I can then use these dividends to buy more investments to make more money in the future.
Dividend income is passive income.  Possibly my favorite reason to own dividend growth stocks is because dividend income is passive.  My goal is to eventually accumulate enough shares of dividend growth companies that I will be able to cover all of my living expenses with the dividend income I am paid.  I no longer will have to work to be able to meet my obligations.  I will be able to do whatever I want whether that is travel, golf, watching sporting events or sitting at home playing video games and watching movies.  Monday morning will come and rather than having to go into the office, I will be able to wake up and decide to do whatever I want.  That will be because no matter what I decide to do, my dividend stocks will be doing their job and paying me a passive income.

There you have it.  These are my top 10 reasons for owning dividend growth stocks.  What is your favorite reason for liking dividend growth investing?  Please share your thoughts in the comments below!