Stock Selection 101
There are a lot of numbers in my table. I hope this effort will make some sense out of them for you.
YIELD: My list of dividend growth stocks is sorted by difference from each stock's average yield. The first three columns have to do with yield. Drawing a pencil line down the table after the first three yield columns might help. The first numeric column is the stock's yield (dividend divided by price). The second column is the stock's average yield, going back about five years. The third column (yld diff) is the difference between the yield and average yield. This is the data I sort on. Notice how the numbers in the 'yld diff' column decrease in value from top to bottom. About half way down the page, the yield difference turns negative. We do not want to buy a stock whose current yield is lower than it's average, that's negative, in other words. Negative yield difference stocks are not value priced. As a result, if you are thinking of buying a stock, only common stocks in the top portion of the list are of interest. Incidentally, and for various reasons, the common stock which is on top of the list is not usually a good one to buy. It's yield difference is often too high.
I can't mention any specific stock names because the list I'm looking at as I write this will be different from the list you are looking at. This is an important point. Stocks in the list slowly move up and down the list as investor sentiment on each varies and with dividend changes. A couple of months from now, a different stock might be the best buy. Spread your purchases out over many months...years even.
PRICE: The next three columns deal with price. The current price, the Graham price¹ and the %dif or G%D, which is the difference in percentage terms between the current price of a stock and this value measurement promoted by Ben Graham in The Intelligent Investor. Notice the average of the G%D column. You are after a stock with a G%D less than this average, preferably less than -20 . Realize it will take a stock with 20% annual growth a year to make up a -20% G%D. Twenty percent a lot. A stock with a G%D of - 40 or higher, is very expensive. I would not buy: there'd be no margin of safety. You'd be out on a limb for years. ¹square root ( bk val per share*avg 3yr trailing earning per*22.5)
GROWTH: three columns deal with growth too. Look to the DG5yr column first. DG5yr is the
annual average dividend growth over the last five years. If things progress the same in the future as
they have in the past, this will be the rate of return on your money. If they don't, well, that's why you
buy six stocks instead of one. There are reasonable assurances, but no guarantees.
You are after a common stock with solid, consistent dividend growth, year after year. Compare the
five year and one year dividend growth numbers. Even better, study my annual six year dividend
data sheet. From it judge the consistency of the annual dividend growth. Don't get too greedy with
very high dividend growth numbers. Ask yourself, if, going forward, that growth is sustainable.
You might decide that Canadian Utilities 4% dividend growth is more sustainable than Leon's 18%.
Dividend growth investors believe that, over the long term, the increase in a common stock's price
will be much the same as the increase in the dividend. I have a column in my table to show the five
year price gain for the same period as the five year dividend growth. This data allows you to
compare price growth and dividend growth. In most cases, price growth is similar to dividend
growth. Amazing, eh! This is a dividend growth investor's 'little' secret...as dividend increases, so
does the price. Think about it. If the yield of a certain common stock remains in its normal range
and the dividend is rising, the price must be rise too...by the same amount as the
dividend...eventually. PAYOUT RATIO: After the ticker symbol for each stock, I have the current
annual dividend per share, the current earnings per share and the payout ratio which expresses a
relationship between the two. Notice the average of the payout ratio column: it's below 50%.
Dividends are paid from earnings. If too much is paid out in dividends, if the payout ratio is too
high, in other words, be wary.
So, the stock you ended up with 1. YIELD - is in the top portion of the list (yield above average), 2.
PRICE - has a reasonably low G%D (a margin of safety) 3 GROWTH - and good dividend grow.
Link to other stock selection sheet