Dividend Investing With a 10/10 Rule - Dividend Earner

I was watching the interview of Tom Cameron on Business News Network this past week where he highlighted the 10/10 rule utilized by his investment firms. It is very pertinent to dividend investors since it’s all about the dividend growth. In fact, 10/10 stands for a company that increases dividends for 10 consecutive years with an average of 10% or more growth in dividends per year.

10/10 Strategy

It’s a simple screening test really. You can follow this process of elimination.

1. Identify companies that have paid dividends for the past 10 years.
2. Identify the companies that have increased their dividends by an average of 10% per year for 10 years.

Rather than focusing on the yield, it focuses on the dividend growth to accelerate compound growth. A consistent growing dividend under a DRIP could double your holdings in a good time frame. Patience is quite important here as the growth in yield over many years is what you bank on to increase your holdings. What is interesting is that a dividend aristocrat may not pass the criteria here even if they increase dividends for 25 consecutive years. The combination of both should provide a really solid investment though.

Top Holdings

Although historical data are available to filter stocks, it’s not always easy to filter on it without putting the data together yourself. Especially when you need to look at historical data. The fund highlights their performance and top holdings on their site but I thought I’d share the holdings here with some extra information. It does in fact keep up with the S&P 500 index, my fellow blogger Andrew Hallam might be impressed Ticker  Co                           Stk Pr    DivYld 10yr Gr  Con Div Inc NVO  Novo-Nordisk A/S $124.42 1.52%    23.5%     14 TEVA TEVA Pharm         $50.00   1.64%    29.7%     10 ADM ArcherDanielsMid  $31.11   2.06%    12.6%     36 IBM  Int’l Bus Machines $166.56  1.80%   17.8%      15 WAG Walgreen                $43.32   1.62%    16.1%      35 NSRGY Nestlé SA           $63.59       -            14%       14 CAH Cardinal Health       $44.51   1.93%    27.6%      14 MCD McDonald’s Corp  $80.98    3.01%    28.3%      34 NVS Novartis                   $63.48    3.72%    10.6%     16 PX Praxair, Inc.              $103.39     1.93%    19.6%    18

 

Thoughts

I went back and looked at the stocks I reviewed in the past months and only one matches the 10/10 criteria: Enbridge (ENB). Power Corp (POW), Power Financial (PWF) and Great-West LifeCo (GWO) each had 8 years of consecutive double digit growth and then lower growth for the last couple of years with no increase in dividends for 2010. A similar faith for the banks. The lack of dividend increase in 2010 basically fails the criteria and takes the companies out of the selection for another 10 years. I still consider them solid companies as you would see from my stock analysis and a reason that following a rigid rule may not always be best but it can sure simplify the process and eliminate emotions. Readers: What do you think of the filtering criteria? Disclaimer: Long ENB.
Dividend Investing With a 10/10 Rule - Dividend Earner

The 8 Rules of Dividend Investing Sure Dividend

 

The 8 Rules of Dividend Investing

The 8 Rules of Dividend Investing quantify the best dividend growth stocks for long-term investors so  you know exactly what stocks to buy and sell.

At their core, The 8 Rules of Dividend Investing identify high quality dividend growth stocks.  These stocks have a mix of a low price-to-earnings ratio, high dividend yield, low stock-price-volatility, and high growth rate.  The Sure Dividend newsletter uses The 8 Rules of Dividend Investing to simplify the process of identifying and investing in high quality dividend growth stocks.

Rules 1 to 5:  What to Buy

Rule # 1 – The Quality Rule

“The single greatest edge an investor can have is a long term orientation”

– Seth Klarman

Common Sense Idea: Invest in high quality businesses that have a proven long-term record of stability, growth, and profitability.  There is no reason to own a mediocre business when you can own a high quality business.

Financial Rule:  Invest only in stocks with 25 or more years of dividend payments without a reduction.

Evidence:  The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Rule # 2 – The Bargain Rule

“Price is what you pay, value is what you get”

– Warren Buffett

Common Sense Idea:  Invest in businesses that pay you the most dividends so you can increase dividend income stream

Financial Rule: Rank stocks by dividend yield.

Evidence:  The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through 2013.

Source:  Dividends:  A Review of Historical Returns by Heartland Funds, page 2

Rule # 3 – The Safety Rule

“The secret of sound investment in 3 words; margin of safety”

– Benjamin Graham

Common Sense Idea:  If a business is paying out all its income as dividends, it has no margin of safety.  When a business downturn occurs, the dividend must be reduced.  Invest in businesses that have higher income than dividends to help ensure dividends won’t be cut during business downturns.

Financial Rule:  Rank stocks by their payout ratios.

Evidence:  High yield low payout ratio stocks outperformed high yield high payout ratio stocks by 8.2% per year from 1990 to 2006.

Source:  High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Rule # 4 – The Growth Rule

“All you need for a lifetime of successful investing is a few big winners”

– Peter Lynch

Common Sense Idea:  Invest in businesses that have a history of solid growth.  If a business has maintained a high growth rate for several years, they are likely to continue to do so.  The more a business grows, the more profitable your investment will become.

Financial Rule:  Rank stocks by long-term revenue growth.

Evidence:  Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4% per year from 1972 to 2013.

Source:  Rising Dividends Fund, Oppenheimer, page 4

Rule # 5 – The Peace of Mind Rule

“Psychology is probably the most important factor in the market – and one that is least understood”

- David Dreman

Common Sense Idea:  Look for businesses that people invest in during recessions and times of panic.  These businesses will have a relatively stable stock price that will make them easier to hold for the long run.

Financial Rule:  Rank stocks by their long-term volatility.

Evidence:  The S&P Low Volatility index outperformed the S&P500 by 2.00% per year for the 20 year period ending September 30^th, 2011.

Source:  S&P 500 Low Volatility Index: Low & Slow Could Win the Race, page 3

Rules 6 & 7:  When to Sell

Rule # 6 – The Overpriced Rule

“Pigs get fat, hogs get slaughtered”

– Unknown

Common Sense Idea: If you are offered $500,000 for a $250,000 house, you take the money.  It is the same with a stock.  If you can sell a stock for much more than it is worth , you should.  Take the money and reinvest it into businesses that pay higher dividends.

Financial Rule:  Sell when the normalized P/E ratio is over 40.

Evidence:  The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Source:  The Case for Value by Brandes Investment Partners, Page 2

Rule # 7 – The Survival of the Fittest Rule

“When the facts change, I change my mind.  What do you do, sir?”

– John Maynard Keynes

Common Sense Idea: If a stock you own reduces its dividend, it is paying you less over time instead of more.  This is the opposite of what should happen.  You must admit the business has lost its competitive advantage and reinvest the proceeds of the sale into a more stable business.

Financial Rule:  Sell when the dividend payment is reduced or eliminated.

Evidence:  Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Source:  Rising Dividends Fund, Oppenheimer, page 4

Rule 8:  Portfolio Management

Rule # 8 – The Hedge Your Bets Rule

“The only investors who shouldn’t diversify are those who are right 100% of the time”

– John Templeton

Common Sense Idea:  No one is right all the time.  Spreading your investments over multiple stocks reduces the impact of being wrong on any one stock.

Financial Rule:  Build a diversified portfolio over time.  Use The 8 Rules of Dividend Investing to rank high quality dividend growth stocks.  Buy the highest ranked stock of which you own the least each month to build your diversified portfolio over time.

Evidence:  90% of the benefits of diversification come from owning just 12 to 18 stocks.

Source:  Frank Reilly and Keith Brown, Investment Analysis and Portfolio Management, page 213

Real Life Examples

I have selected 5 of the top 10 high quality dividend growth stocks using The 8 Rules of Dividend Investing so you have an idea of what businesses fit the 8 Rules:

The majority of 8 Rules stocks are well known businesses with a long history of profitability.  They are familiar household names.  This is because they have been so successful for so long.  I personally feel a sense of relief knowing I am invested in tried and true businesses that have withstood the test of time.  I hope you do as well.

The 8 Rules of Dividend Investing Sure Dividend

Investools Market Forecast March 9 2015

David uses a proprietary tool called Market Forecast that was developed within Investools and they do not divulge the fundamental factors that go in to creating the trend lines.  That said, it is very informative and worth consideration.  While this is not a widely read blog, those of you that do make it here, I strongly recommend Investools as part of your plan to manage your own investments.  Thanks...

Dividend Aristocrats from Sure Dividend

Credit goes to suredividend.com for this material…

Sure Dividend

High quality dividend stocks, long-term plan

See The 8 Rules of Dividend Investing

March 2015 List of Dividend Aristocrats

The Dividend Aristocrats Index is comprised of 53 stocks that have paid dividends for 25+ consecutive years.  In addition to the exclusive dividend history requirement, Dividend Aristocrats must also be members of the S&P 500 Index and meet certain size and liquidity requirements.  The Dividend Aristocrats Index has outperformed the market by a wide margin over the last decade, is the image below shows.
Source:  S&P Dividend Aristocrats Fact Sheet

List of All 53 Dividend Aristocrats

The spreadsheet (or picture) below lists all 53 Dividend Aristocrats for March of 2015.  You can sort by dividend yield, standard deviation, growth rate, or payout ratio.
March 2015 Dividend Aristocrats List – Excel Download
March 2015 Dividend Aristocrats List – Picture Download

Explanation of Financial Metrics

The four financial metrics included in the spreadsheets are the same metrics used in the buy rules from The 8 Rules of Dividend Investing, and in the Sure Dividend Newsletter.  A brief explanation of each metric is below.  All data is from the market close 2-27-15.
Dividend Yield Dividend yield is calculated as 4 x most recent dividend / current price.  This is the standard calculation for dividend yield and shows what percentage of dividend income you can expect on your investment in the first year (assuming no dividend increases or reductions).
Standard Deviation Standard deviation in the spreadsheet above is calculated over a stock’s 10 year price history (when available).  Long-term price histories are used to reduce the effects of unusually high or low volatility in the recent past.  Interestingly, stocks with low price standard deviations have historically outperformed the market.  Better price returns have (obviously) come with lower ‘risk’ as defined by academics due to lower stock price standard deviation.  I don’t believe standard deviation to be a true measure of risk, but it is a good proxy for measuring real risk.  It has worked to improve returns historically; the historical record should not be ignored.
Growth Rate The growth rate used in the spreadsheet above uses 10 years of data (when available).  Growth rate is calculated as the lower of 10 year revenue per share growth or 10 year dividend per share growth.  For financial sector stocks, 10 year book value per share growth is often used in place of revenue per share growth.  Using long-term growth paints a clearer picture of a company’s real underlying business growth as it removes the random noise that comes with year-over-year growth rates.  Taking the lower of revenue or dividend growth prevents companies that have unsustainable increased their dividend faster than underlying business growth or that have grown revenue without increasing dividends substantially to show a high growth growth rate that is unwarranted.
Payout Ratio The payout ratio is calculated as last dividend payment x 4 / trailing-twelve-month earnings per share.  Adjusted earnings per share are used when applicable instead of GAAP earnings per share to minimize the effects of short-term or one-time events on the payout ratio.

Final Thoughts

The March 2015 Dividend Aristocrats list is a quick and easy way to generate investment ideas for dividend growth investors.  The Dividend Aristocrats Index is comprised of high quality businesses with long histories of rewarding shareholders with rising dividends.  Many of the stocks in the Dividend Aristocrats Index are ‘household names'; companies or stocks that are known by many people.  Some examples of these well-known blue chip Dividend Aristocrats include:

• Coca-Cola (KO)
• Wal-Mart (WMT)
• PepsiCo (PEP)
• Johnson & Johnson (JNJ)
• 3M (MMM)
• Target (TGT)
• Clorox (CLX)
• AT&T (T)
• McDonald’s (MCD).