As you probably know already, each year I select 20 US and 10 Canadian dividend stocks that will outperform the dividend index (and hopefully the overall stock market). I started this tradition back in 2012 and so far, I’m almost always right. This means that almost all my portfolios have beaten their benchmark year after year.
Some folks may think I’m doing this to show off, but that’s not the purpose. I carefully choose these companies based on my 7 dividend investing rules. The purpose of this book is mostly to demonstrate that you can create a very strong stock list of stocks if you use the right metrics to start with. Here’s a recap of the first four metrics I use.
#1 Never Pick High Dividend Yield
I already wrote a complete case against high dividend yield. The point of this article is that when you pick a high yield dividend stock, you sacrifice future growth in the name of higher income today. Since I invest for the long term, I don’t like to sacrifice the future in the name of money in my pocket today. This is why I have discarded all stocks paying over 5% yield and I’m very careful with stocks paying between 4% and 5%. Exceptionally I will take a look at a higher yielding stock if there is a very good reason such as the stock price dropping irrationally thereby boosting the yield to a high level.
#2 Focus on Dividend Growth
The dividend growth over the past 3 and 5 years are very important metrics for me. I like when both metrics are about the same growth rate as it gives me a better idea of where the company is going. A big boost in dividend payments over one year could drastically influence numbers over a 3 or 5 year period. This is why I take a careful look each year during this period. I would rather pick a company that is growing its dividend by 6% each year than one that is going on a crazy trend of 18% for a year or two and then stops growing.
#3 Make Sure the Company Dividend Is Sustainable Forever
I know, the F word is almost impossible to guarantee in finance since “forever” usually means 3 months on Wall Street. However, if you cross reference the dividend payment with the payout ratio, you can see something very interesting; how the payout ratio reacts when the dividend increases. You can always play with earnings over a short period of time, but you can’t do this forever over several years. A 5 year graph is usually enough to determine if the company is increasing its payment only to please investors or if it can really afford it.
#4 What’s the Business Model?
Metrics will only tell you a part of the company story, but the real deal is found in the company’s business model.
Does the company have a strong competitive advantage?
Do you even understand how its business works?
And most importantly; do they operate the business successfully?
I’ve seen too many companies promoting how good they are without showing strong revenue and earnings growth throughout the year. I don’t really need to know if you are good or not if you can’t close sales, right? I don’t like thinking about the “potential” and would rather invest in something that makes money now.
Mid-Year Results – I’m Beating Both Benchmarks
I’m very proud to announce that both portfolios performed better than their benchmark. I use the VIG ETF for the US market and the XDV ETF for the Canadian Market. Here are my results:
US Dividend Stocks
As you can see, I have a few very bad performing stocks in my portfolio. In order to beat the benchmark (and often beat the overall market), I take a few aggressive picks. Sometimes it pays off (I have three companies showing double digit returns) while I get bitten once in a while (four stocks shows double digit negative returns).
Canadian Dividend Stocks
My Canadian performance is more balanced as 8 stocks out of 10 beat the benchmark and this is probably why I show an added value of 6.38%.
I think there are still very good stocks to be bought at the moment, especially those who went down in both portfolios.
Want More? I have 23 other Dividend Stock Picks in my Book!
I’ve compiled a list of 20 US dividend stocks & 10 Canadian dividend stocks to do well in the market for 2015. You just read about four of them and there are still lots to discover in the book! The book includes the 20 dividend stock analyses plus 10 more for Canadian dividend stocks. That’s 40 pages worth of information for only $4.99.
This year, I offer both versions: PDF or Kindle.
Click on the button below for the PDF file
Click here to buy the Kindle version (Amazon link)
Recently, I was just thinking about what was better, yield or growth? I wanted higher payouts so I could use it and invest into other stocks. So I thought that the first 10 years I could be buying high yield stocks and then the next 10 years high growth stocks. But then realized that growth needs time to pay off and that my thinking was actually backwards, although my protfolio growth might be smaller the first 10 or so years, but later it would pick up nicely. Your post confirmed my thinking though.
Hello Martin,
personally, I prefer lower yield with higher overall growth potential. The growth can come from the payment increase or the stock value (and ideally from both!). However, it is easier for a company paying a low 2% yield to increase its payment as such company usually show lower payout ratio and better fundamentals. Since the risk is low, the yield follow this trend. A higher yield is offered to compensate either #1 a higher risk or #2 lower growth potential (such as utilities that will grow, but at a slower pace).
Cheers,
Mike