Day#3 What is the Best Dividend Growth Stock?

We are now at our Day#3 of the 6 Days to Dividend Growth Investing series. I previously discussed how to find your purpose to invest and why I choose dividend growth investing to manage my portfolio. But knowing why you put money aside and that dividend investing is a sound way to make it grow doesn’t tell you which stock to buy. It doesn’t tell you how to manage your portfolio as a whole either. This article may become your best friend for the years to come when you will have a stock purchase to make. I’m not going to give you a list of stocks to buy nor a model portfolio. You are smart enough to make your own decisions. However, you might want a few tips on where to start your stock research. This is what this article is about.

If there is one metric, it’s dividend growth

I’m always looking for the perfect dividend growth stock. And if there is only one metric I must look at, it is the dividend growth! You can pretty much take 10 or even 20 metrics to include in your stock filter to narrow your research as much as possible. I’ve found that I can save lots of time by using this simple metric; how much does the dividend payout grows year after year. There is a complete rationale behind this statement.

If a company is able to sustain a year-after-year dividend growth policy, this automatically implies it has more profits to share. If profits grow on a consistent basis, chances are that sales are following the same trend. It is possible to increase profit for a short period of time without increasing sales. For example, a company that cuts its costs, improves its productivity or sells assets will automatically realize greater earnings than the year before. However, the company likely won’t cut its costs 5 years in a row either as there is a limit to productivity increases or assets sales that boost earnings. At one point or another, sales will have to rise to follow the parade. Then, if sales increase, this means the company is sitting on a strong business model. This model will help management cruise through a recession and enable the company to evolve to the next level. Finally, if the company is able to evolve and keep its dividend growth rate stable over time, your payout will not only increase, but the stock value will soar as well.

This rationale all makes sense, but there is nothing like a graph showing empirical evidence that dividend growth is the most important metric of all:

As you can see from the data compiled by Bloomberg, the biggest dividend growers show the highest rate of returns among US stocks. Therefore, there is a direct correlation between your portfolio return and your dividend growth rate.

Dividend growth data is not that easy to find

Unless you have all the time in the world to find the hidden gem in the market, it’s almost impossible to get dividend growth metrics for several companies. The problem is the following; most stock filters don’t compile historical dividend growth over 3, 5, 10 years and more. Therefore, if you are looking for this metric, you will have to manually calculate it from the investor relations section of each company’s website. This is monk work and nobody likes to compile data. I know I don’t anyway! This is why I provide 5 year dividend growth data to my DSR members ;-). I’m able to do that because we pay for a professional package at Ycharts costing $300 per month!

But you don’t have to become a DSR member or register with Ycharts to find strong dividend growth stocks. All you need is to combine more metrics in your filters. Before using Ycharts, I used FinViz which is a free stock filter website. With FinViz, you can search for a combination of 1 year and 5 year growth for earnings and revenues. If you have find companies showing growth for both earnings and revenues while keeping a reasonable payout ratio, you already have a good starting point.

Another place you can find dividend growth payers are among the dividend lists. The most common are the Dividend Aristocrats (companies with 25 years of consecutive dividend increases), the Dividend Champions and the Dividend Achievers (a list of 238 companies that increased their dividend for at least 10 consecutive years).

Since I want to make sure you have a good starting point, I’ve compiled the three lists on this site and added some metrics to help you out. Click here to download the excel spreadsheet for:

Dividend Aristocrats

Dividend Champions

Dividend Achievers

The next Day will be about starting the real game; investing in your first dividend stock!