So here’s what I usually do and where I usually start. I believe, rightly or wrongly, that companies that continue to increase their earnings will, over time, have a similar increase in the market value of the company itself and therefore the value of it’s stock. I generally like companies that increase their earnings by 8% or better per year. That way the value of my portfolio will increase by approximately the same amount.
Young companies tend to keep all their earnings and reinvest them into the company so it can grow, which is a good thing. Unfortunately they usually don’t pay dividends. This is why these companies are called Growth Companies. Other companies, generally old companies, tend to pay a large dividend because they no longer know how to grow their earnings internally so they just give their earnings to their stockholders in the form of a dividend. This is why these companies are called Income Companies. And then there’s a third group. This group pays out part of their earnings in dividends and keeps the other part of their earnings to grow the company. These companies are sometimes referred to as Growth and Income Companies. Each of these types of companies may be of some value to some investors but for me, if they’re not increasing their earnings by at least 8% per year, I’m just not interested.
At my age, I have little interest anymore in the first type. I prefer the latter two types. This is because at my age I like dividends. A lot. I look for companies that not only pay a nice dividend, but companies that increase their dividends annually over a rather lengthly period of time. That way I can see the predictability in their earnings as well as their dividend increases. I am so attached to companies that increase their dividends annually that if a company that I own doesn’t increase their dividend annually, that stock is sold and replaced with another that does. It’s that simple.
Now you would think that it would be tedious to scour the 15,000 or so stocks listed on the NYSE, AMEX and OTC but it’s not. That information is readily available and it’s free. You can Google that information but this is where I usually find it. A website titled Dividend Yield - Stock, Capital, Investment. It’s a terrific site and it lists all kinds of dividend yielding stocks.
My favorites are the Dividend Aristocrats and the Dividend Champions. They are very similar lists with a lot of overlap. The main difference is the pool from which they are sampled. Dividend Aristocrats measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years. Dividend Champions are sampled from the entire pool of stocks and are stocks that have increased their dividends year after year over a period of 25 or more consecutive years.
Since some stocks that have increased their dividends less that 25 years will eventually pass this threshold, and some companies on this list will fall on hard times and not increase their dividend or worse cut their dividend, this list is updated monthly. So it’s wise for me to update my potential investment candidates monthly.
Once I get my list of candidates, I often use a screener, some daily and weekly charts, and my favorite stock chart indicators. I will discuss those in later posts but for now if you are wondering where I find good stock candidates, I usually start with the Dividend Aristocrats and Champions.