“Look to add quality, dividend-paying, blue chips when they become irrationally oversold and undervalued. That is how and when experienced investors create blue chip investment portfolios which serve them well throughout their entire lives with growth of capital and growth of dividend income.”
So how do I find these stocks? The easiest way is to let someone else do the work for you. This is not always the best way but it is the easiest way. The easiest place to start looking for solid dividend growth stocks is by reviewing the list of Dividend Kings or Dividend Aristocrats. These companies have been increasing dividends for a minimum of 50 and 25 years, respectively. That achievement by itself is reason to give these companies a look.
At this point every investor needs a series of thresholds to cull the good from the bad. I personally like to see a dividend of at least 2.5% and a PE ratio of less than 20. Digging deeper I like to see a payout ratio of less than 50% and sufficient cash flow to cover the dividends. I also like to see revenues and earnings increasing and I like to see the dividend growing at a rate faster than inflation. Beyond this, different investors look at additional fundamental indicators and pare down the number of candidates for consideration.
Once I've identified a number of companies that fit my requirements I investigate the stock's price chart. The first things I look at are the 5, 10, and 20 period moving averages. I prefer to see all three of these averages moving in sync with each other and moving in a relatively similar direction. I use Bollinger Bands to discover the variability from the mean of the price action. In addition to this price chart action, I look at several momentum indicators. I use the RSI to determine if a stock is overbought or oversold and if it is beginning to reverse direction. I use the MACD to look for moving average crossovers which alert me to a change in direction. Finally I use the Direction Movement (with ADX indicator) to identity the direction, change and intensity of the company's stock price movement.
When all of this things line up I execute the trade. If everything is correctly in place I am now the proud owner of stock bought on sale, in a company that will hopefully pay me an increasing stream of dividends for years to come. By doing this I have provided myself with an investment that will pay me on a regular basis and increase that payment over time. Hopefully I am not only ensuring a constant and reliable stream of income well into the future but one that provides me with a raise each and every year.
By owning dividend growth paying stock I am in essence giving myself a raise each and every year for years to come. That's nice information to know and a great place to be in life. I hope one day everyone finds that place in life. Good Luck and Good Trading!