Dividend Growth Investing Strategy: Goals and Stock Selection Criteria

Dividend Growth Investing (DGI) is an investment strategy focused on stocks that regularly increase their dividends. This strategy can be an excellent way to achieve a steady income while benefiting from the long-term growth of stock values. The goal of this strategy can be to achieve a yield-on-cost (YOC) of 8-12% over 10 years. In this article, we will explore the key selection criteria for stocks and present a list of dividend aristocrats.

Goals of the Dividend Strategy

1. Yield-on-Cost (YOC):

- The main goal is to achieve what is known as yield-on-cost (YOC), representing the percentage of the annual dividend relative to the stock price you paid. If you invest 1000 CZK in a stock that pays 50 CZK annually, your YOC would be 5%.

1. Dividend Growth:

- DGI focuses on stocks with a history of dividend increases, which indicates stable business performance and assured cash flow.

1. Long-term Commitment:

- DGI is not about quick gains; it's designed to invest in companies for a long period, allowing the power of compounding to work.

Stock Selection Criteria

To achieve the targeted YOC, it is important to follow several criteria when selecting suitable stocks:

1. Payout Ratio < 60%

- Definition: The payout ratio is the percentage of a company's earnings paid out to shareholders in dividends. Ideally, it should be less than 60%, indicating that the company has ample capital left for growth while still paying dividends. - Example: If ČEZ (ticker: CEZ) has a payout ratio of 40%, it means that 40% of its earnings are distributed as dividends, leaving room for further growth.

2. History of Dividend Increases

- Definition: Ideal stocks should have a history of increasing dividends for at least 10 years, showing the stability and growth of the company. - Example: Procter & Gamble (ticker: PG) has over 60 years of continuous dividend increases.

3. Free Cash Flow (FCF) Coverage

- Definition: Free cash flow coverage is the ratio of free cash flow to dividends. Ideally, it should be 1.5x or more, indicating that a company can cover its dividends comfortably. - Example: Microsoft (ticker: MSFT), which usually has a strong free cash flow, often exceeds a 1.5 FCF coverage, reflecting its ability to consistently raise dividends.

List of Dividend Aristocrats

Dividend aristocrats are companies that have increased their dividends for 25 years or more. This includes both well-known US companies and local examples:

Ticker	Company Name	Country
PG	Procter & Gamble	USA
JNJ	Johnson & Johnson	USA
KMT	Kofola	CZ
ČEZ	ČEZ a.s.	CZ
SWK	Stanley Black & Decker	USA

Utilizing QMA Tools for Dividend Investments

On the QMA platform, you can utilize various tools for efficient stock selection:

• 5-pillar score: This metric evaluates the health of a company in five areas, helping you choose stocks with favorable dividend prospects.
• Smart Money: Allows you to track where large institutional investors are investing, which can be helpful in selecting dividend stocks.
• Screener: With the screener, you can filter stocks based on various criteria, including payout ratio, FCF, and dividend growth.
• QMA-Picks: This tool provides you with recommended stocks for investment.
• Portfolio-Health: Monitors the overall health of your portfolio, helping you manage your investments effectively.

Conclusion

The dividend growth strategy is a long-term lucrative approach that requires careful stock selection. It is crucial to monitor payout ratios, dividend growth history, and FCF coverage to achieve a target of 8-12% YOC over 10 years. Consider leveraging QMA tools to optimize your investment decisions.

Where to find this in QMA

All the mentioned tools and features are available on the QMA platform, where you can browse dividend stocks, track Aristocrats, and build a strategic portfolio for dividend growth. You can also find detailed insights on the individual criteria and analyses.

Disclaimer

This article is for informational purposes only and does not constitute investment advice. We do not guarantee any specific results or returns on capital.