08-20-2013, 07:50 AM
Great post and great questions, Ok Red! (And you got an audible laugh out of me with "Royal Baby"!)
Just out of curiosity, what are the 13 stocks that your screen gave?
Without doing any analysis, I'd say that if you want to adjust your screen in a way that gives you a bigger universe of stocks to start investigating further, you're going to have to relax either your earnings growth criteria, your dividend growth criteria, or both. 8 percent and 10 percent on those, respectively, eliminate a ton of excellent DG stocks.
I might also eliminate the debt/equity parameter altogether and see what happens. It is certainly an important number, and you definitely want to understand the debt and balance sheet situation before investing, but perhaps it is too restrictive on the initial screen. Lots of companies with excellent cash flow have increased debt load substantially in the low rate environment of the past few years. So high debt could be a disqualifying warning sign, but it could also just be a very prudent and rational reaction to the interest rate environment. For example, I doubt PM would pass that screening metric because of high debt, but I give them a pass for it because I think it was a good move by management.
That said, I do not personally use a formal screen as my first step in looking for good dividend growth investments. My *first* step is almost entirely informal -- I essentially crowdsource the initial screening process. I read a lot of articles and comments, I scan David Fish's CCC lists, and I look at the favorite dividend stock lists of some of the other writers that I respect.
When I see a name repeated frequently and it catches my interest, or when someone with some credibility recommends a name, I'll give it a five-minute review. That is, I'll pull it up and see if it has a streak of raising the dividend going, I'll scan earnings, yield, and payout ratio and the such. Many companies do not survive even this cursory review.
But for the ones that do, if I see a potentially compelling story, I'll add the company to my watch list and do a much deeper dive into the numbers and the business, creating a separate spreadsheet for the company showing all of the metrics I'm interested in. (You can read all about my entry criteria philosophy here.) I actually score and rank the stocks using a very rudimentary scoring system that I made up. Finally, if a stock looks good to me and looks like it could be a good addition to my portfolio, I'll start reading all I can about it to see if I believe the story is good and the future promising.
I guess then that my approach feels more haphazard than starting with a screen. A screen can be a great way to find good candidates. But I've always found them too limiting. There are just so many great stocks that fall short on one metric -- very few stocks are firing on all cylinders at the same time. (And the ones that are may then fail the p/e metric because people are buying it up!)
Finally, I'd add that after spending a bunch of time in the dividend growth world, I've come to realize that the universe of stable, reliable dividend payers and growers just isn't all that large. You'd never need to know more than 50 to 100 names, and a large percentage of them are names you are already familiar with. The others you come across just by hanging out in the DG world.
Sorry if I've gotten off topic from your specific question, and I hope this hasn't come across as preachy. Hope to help in any way I can!
Just out of curiosity, what are the 13 stocks that your screen gave?
Without doing any analysis, I'd say that if you want to adjust your screen in a way that gives you a bigger universe of stocks to start investigating further, you're going to have to relax either your earnings growth criteria, your dividend growth criteria, or both. 8 percent and 10 percent on those, respectively, eliminate a ton of excellent DG stocks.
I might also eliminate the debt/equity parameter altogether and see what happens. It is certainly an important number, and you definitely want to understand the debt and balance sheet situation before investing, but perhaps it is too restrictive on the initial screen. Lots of companies with excellent cash flow have increased debt load substantially in the low rate environment of the past few years. So high debt could be a disqualifying warning sign, but it could also just be a very prudent and rational reaction to the interest rate environment. For example, I doubt PM would pass that screening metric because of high debt, but I give them a pass for it because I think it was a good move by management.
That said, I do not personally use a formal screen as my first step in looking for good dividend growth investments. My *first* step is almost entirely informal -- I essentially crowdsource the initial screening process. I read a lot of articles and comments, I scan David Fish's CCC lists, and I look at the favorite dividend stock lists of some of the other writers that I respect.
When I see a name repeated frequently and it catches my interest, or when someone with some credibility recommends a name, I'll give it a five-minute review. That is, I'll pull it up and see if it has a streak of raising the dividend going, I'll scan earnings, yield, and payout ratio and the such. Many companies do not survive even this cursory review.
But for the ones that do, if I see a potentially compelling story, I'll add the company to my watch list and do a much deeper dive into the numbers and the business, creating a separate spreadsheet for the company showing all of the metrics I'm interested in. (You can read all about my entry criteria philosophy here.) I actually score and rank the stocks using a very rudimentary scoring system that I made up. Finally, if a stock looks good to me and looks like it could be a good addition to my portfolio, I'll start reading all I can about it to see if I believe the story is good and the future promising.
I guess then that my approach feels more haphazard than starting with a screen. A screen can be a great way to find good candidates. But I've always found them too limiting. There are just so many great stocks that fall short on one metric -- very few stocks are firing on all cylinders at the same time. (And the ones that are may then fail the p/e metric because people are buying it up!)
Finally, I'd add that after spending a bunch of time in the dividend growth world, I've come to realize that the universe of stable, reliable dividend payers and growers just isn't all that large. You'd never need to know more than 50 to 100 names, and a large percentage of them are names you are already familiar with. The others you come across just by hanging out in the DG world.
Sorry if I've gotten off topic from your specific question, and I hope this hasn't come across as preachy. Hope to help in any way I can!