Within the last few years, I have focused my investing towards dividend growth stocks. I appreciate the monthly or quarterly payments I receive as shareholder of a variety of US companies. This income continues to grow over time and I will use it to cover future expenses during retirement. Deciding to start dividend growth investing is easy–picking the right stocks, however, may prove more of a challenge. The following is a guide that I use to pick the right dividend paying stocks for my portfolio.
Focus the Selection
There are tons of companies listed on stock exchanges all over the world. I mainly stick to US corporations for familiarity and overall stability. To narrow the field even more, I select from a smaller pool of companies that have paid increasing dividends for at least five years. This is the bare minimum amount of time for me to even consider a security. David Fish maintains a thorough spreadsheet of such stocks with monthly updates to the accompanying data. This is an excellent resource and great place to start. Normally, I focus on Dividend Aristocrats, those companies that have payed and raised their dividends for at least 25 years. I know that these businesses are fairly safe investments and thus perfect for my dividend-paying portfolio.
Understand the Business Model
I always choose a company whose business model is easy for me to understand. For me, that means staying away from technology, financial, and retail stocks. These sectors are usually unpredictable and offer low to no dividend income. Plus, I just don’t have enough time or interest to follow the latest tech trends or banking regulations. I look for boring, stable companies that have been around forever and create products that are recession-proof. Think Coca Cola (soft drinks, water, and juices), Altria Group (Marlboro cigarettes), or Procter and Gamble (laundry soap and toothpaste). I “get” these companies and understand that consumers buy their products daily, regardless of the economic situation. People may or may not buy the latest Apple gadget, but I know they’ll be brushing their teeth everyday.
Determine Fair Value
Once I have enough funds to purchase shares of a company, I want to pay fair value or better for the stock. Fair value is an estimate of a security’s worth based on, among other things, future earnings potential. There are many financial websites out there that help calculate fair value of a stock. I use these sites as a guide before determining where to invest my money. If I pay fair value or less, I should receive a higher dividend yield, which adds up over time. Purchasing a security at the optimal price has made me a very patient investor. For example, instead of rushing to buy shares of Exxon Mobil after payday, I now research and watch the stock market for the best time to enter. In this game, the tortoise always beats the hare.
Good luck and happy investing!
I am not a professional financial manager, just someone interested in taking charge of my own money. Please conduct your own research before investing. Long KO, MO, PG, and XOM.
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