One thing that I feel many a dividend growth investor can find themselves stumbling over is chasing a higher and higher yield. This can be a trap however as we can just as quickly find ourselves sinking in a handful of stocks that had a high yield but stalled out and dive bombed with the trash that they came with. With this being said, I wanted to talk about some key things that I try to keep in mind every day that help keep me grounded and moving in the right direction. These items I would argue are the key to obtaining qualify dividend growth stocks.
The first thing I try to do when I'm looking for a good dividend growth stock is find a stock that fits the price that I want to pay for it. If we buy in at a low price for a good company that is simply seeing a short dip, we can enter in while the dividend is at its highest.
It's no use getting a good price on a stock when that dividend may just stall out. This is why it's important to look at the dividend growth history of that stock as well. Generally I try to aim for stocks that have been paying for at least three years straight. Most investors like to aim for longer terms than that but I like to give the benefit of the doubt to upcoming contenders as there has to be a level of risk involved in order to gain status in a company before it has truly been discovered.
Low Payout Ratio:
A price can be good and the growth can follow but those two items need a low payout ratio of profits to be sustainable. I like to aim for stocks with a payout ratio of less than 70% but ideally I want something as low as I can get the percentage in relation to the yield. The lower the payout ratio and the higher the yield, the happier I can be when I snag it!
Cash Cash Cash:
Just as I like to generate cash for my own portfolio, I like to make sure my companies do as well. After all, if they don't have cash laying around for emergencies, they may be welcoming a bad time when they arrive. Murphy's Law will find you when you want it to least. Head this problem off at the pass by choosing companies with good amounts of cash in reserves as a moat against issues.
These are just a few items that I like to keep in mind. There are definitely more but I will make sure to keep those in my back pocket for more discussions later. Let me know what you think - what your key areas of focus are or otherwise!