I spend an inordinate amount of my free time researching companies to find just the right dividend growth company to buy stock in. I look at a company's fundamentals over a period of years to ensure that it’s sales, earnings and dividends have increased on a regular basis. That's essential for a healthy growing company. I spend even more time looking at the company’s technicals and its stock chart to determine the point at which I think I can get the best possible price. Finally when I feel that the situation is in my favor I execute the transaction. At this point I am more or less committed to owning the stock for as long as the conditions merit. Hopefully this is for a very long time.
Once I own this dividend growth stock my primary concern becomes the continuation of the dividend well into the future. I understand that the company's sales and earnings may be volatile from quarter to quarter and that earnings estimates may even be missed at times, but I expect the dividend to be maintained and even increased at least once per year or I no longer have a desire to maintain ownership. For the most part the dividend is the reason that I bought the stock in the first place and it’s the continuation and increase of that dividend that tells me to continue to hold that company’s stock. If a company has the ability to continue to raise its dividend, then the stock price will eventually rise and my personal wealth will rise also.
Dividend coverage is also essential for a company to continually increase its dividend. I expect the company's earnings to be consistently greater than the company's dividend so that the payout ratio is less than 100%. In fact, a payout ratio of less than 50% is ideal for any company. At the 50% level there is sufficient retained earnings to grow the company's earnings in future years in order to increase the dividend, which is exactly what I want.
"I don't like stock buybacks. I think if a company has the money to buy their stock back, then they should take that and increase their dividends. Send it back to the stockholder. Let them invest their money again from the dividends."
Over time individual stocks as well as whole stock sectors can become out of favor with investors. This often is the result of news articles, rumors, earnings reports, brokerage house projections, the overall economy in general, or any of a number of reasons. The result is that the company’s stock price can temporarily decrease with absolutely no relationship to the company's actual sales and earnings. The company's earnings are coming in and increasing and the dividend is increasing, but the stock price is falling. The result is that the Price per Earnings Ratio (P/E) is falling and the PEG (Price per Earnings relative to Growth) may even fall below 1. This condition results in a buying opportunity for the wise investor.
This decreased stock price results in an obvious increase in yield for the stock. The increase in yield results in an increase in income for me. In the end this is exactly what I am trying to do -- increase my income to a sufficient level prior to retirement such that a comfortable retirement is possible. If the company is able to increase its dividend at a rate faster than inflation my standard of living will actually increase during retirement. This is the situation that all investors want to eventually find themselves in.