What Should a Dividend Growth Investor Buy in 2020?

Many readers have written to tell me they are sitting on some cash ready to be invested. Some of you sold a rental property or quit their job and received their pension plan value and decided to manage that pile of money on their own. Some others choose to keep their powder dry in order to capture market inefficiencies. Before telling you where I will invest for 2020, I wanted to address this problem:

When is the right time to deploy a massive amount of money and what does a dividend growth investor buy in 2020?

Long-time readers will know that my answer to this question is “today”. Today is always the second-best time to invest your money. The best time was yesterday. But I know that no matter how many times I share this thought with you, some will be reluctant to act. Instead of showing you why investing now is crucial in your investing plan, let’s take care of that reluctance instead.

Do you know how we travelled for 1 year with no savings, a mortgage and 3 kids?

That’s right. In 2016, we bought a 25’ motorhome that we named “Freefall”, and we drove all the way down to Costa Rica with our three kids. We made the decision to leave everything behind for this dream during the summer of 2014 and we left on June 4^th, 2016. The first two questions most people ask me when I announced that project are:

“How did you save enough money to be able to travel for an entire year?”

Short answer: I had virtually no savings (we left with $3K in our bank account).

“How did you manage the homeschooling of your children?”

Short answer: that was the hardest part of the trip ?.

As you can imagine, we had several “good reasons” to not invest (pun intended) all our energy in this project. We had debts (notably our mortgage), three young children, I’m not a handyman or an able mechanic, and we didn’t speak Spanish.

Any of those reasons were good enough to not go forward with the project. But, here’s our little secret on how we made all of this happen: we played “what if”. Instead of stopping at each obstacle, we just pretended it didn’t exist for a moment and continued our planning saying:

“what if we found a solution later on, where would we go?”

Then other positive questions were addressed such as “which nice adventures could we have with our children?”, “which villa could we rent in Costa Rica?” or “when could our family visit us during the trip?”.

We basically simulated our trip while ignoring most obstacles. I discovered the brain works like a very mysterious and spontaneous machine. While we were advancing in our planning, solutions to all our problems came along. We rented the house to a super nice family, teachers found us books we could use to homeschool the children, and my business (starting with Dividend Stocks Rock) started to pick-up and generate cash flow. On a side note, I learned to become a handyman while I had to replace my black water pipes and repair my awning after hitting a truck mirror with it… I guess we can learn anything when we really need to!

Now back to the investment strategy for 2020

If you are reluctant to invest your money in 2020, let’s do what we did with our crazy project; let’s ignore the obstacle and play “what if”. What if 2020 is an amazing time to invest, how would you do it?

First, you would need to build a buy list. It’s impossible to click on the “buy button” without having thought about it. Therefore, instead of thinking about all the great catastrophes that could hit your portfolio this year, how about listing the best companies that will help you achieve your goals? Let’s start by building a buy list.

Start with the dividend triangle

My first stock screener is a simple, but greatly effective one called the “dividend triangle”.  I’m looking for leaders in their markets with strong growth vectors. Companies that have the ability to not only increase their sales but also show profit growth. Finally, I’m looking for companies that are shareholder friendly and that will increase their dividend year after year. This is why the first three metrics in my filter are:

Revenue growth (5 year trend)

Earnings per share (EPS) growth (5 year trend)

Dividend growth (5 year trend)

If you are concerned about the market being overvalued, your best bet will rely on finding companies with a strong dividend triangle. Those companies won’t let you down during the next recession and will likely recover faster upon a market correction. I’m not the one saying this, even Vanguard established that dividend growers outperform the market with less volatility.

3 Metrics won’t do it for 2020

Using the dividend triangle will only get you on the right foot, but that’s far from being enough. First, 5-year metrics will only tell you what previously happened. This is not a guarantee for the future. To have a better idea of where to invest in 2020, I look at the 5-year trend for various metrics.

• Dividend triangle trend (how revenue, EPS and dividend increase year per year)
• Payout and cash payout ratios
• Long-term debt and debt to equity ratio
• Cash flow from operations
• Price-earnings ratio (PE)

Studying trends will tell me which quarterly earning report to open and where to dig to find answers to my questions. Any jump or sudden drop in the following metrics need to be explained. Once this is done, I’m ready to write my investment thesis.

My Investment thesis for 2020

While many authors will predict what will happen in 2020, I’ll go the other way around. To be honest, I don’t really mind what will happen in 2020. What I know is that my portfolio will generate more dividends than it did in 2019 and 2018 and all the other years.

I don’t buy stocks for 2020, I buy stocks for the next 20 years. The power of dividend growth will do the rest for me. Here are a few examples of companies that should be in your portfolio.

Top stocks for 2020

Now, let’s continue to play “what if” and look at my top picks for 2020. Enter your email address here and you will access 6 of my favorite stocks for 2020:

By being cautious and sticking to your investment process, you will find that some of those companies will not likely be hurt that much if a recession hit in 2020. Most importantly, you can and will find companies that will continue their dividend growth policy while their share price decreases temporarily. I’ve tested my methodology over the past decade. Dividend growth investing worked even in 2018 when the market was down double-digits.

 

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