Wednesday, May 6, 2009

Dividends - Part 4 - Dividend Yield vs Dividend Growth

In eight years I expect to retire from my full time job. So I have eight years to contribute to my retirement accounts and grow their value. I invest in a mix of mutual funds (active & index), TIPS Treasury Bonds, and individual stocks.

Over the past two years my stock picking criteria has evolved considerably. Now I use a fairly complicated screening formula to select the companies I buy. But, to even make my consideration list, a company must pay dividends.

My formula strongly favors companies that grow their dividends over time and I’ve noticed that high yield stocks with slow but steady dividend growth and low yield stocks with high dividend growth can both pass my test – if the combination of the two (yield and growth rate) exceeds my current 10% discount rate.

I was surprised at this result. Until recently I abjured utilities as growing too slowly and also dividend paying growth stocks with yields less than 2%. But in reality it is the combination of yield & growth that results in return on investment.

Only a few utilities and growth stocks meet my criteria and I’m getting fussier as I slowly reduce the number of different companies I own. My intention is to reduce the number to between 15 and 20 companies selected for expected long term return on investment and long term competitive advantage; a “wide moat” in Buffet Speak.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts

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