Wednesday, June 28, 2023

How to find companies for my dividend portfolio

I am a buy and hold dividend growth investor. This means that I build my portfolio patiently. It also means that I rarely sell. I buy stocks to hold for decades, and would do so for as long as the dividend is not cut or for as long as a company is not acquired. This inactivity keeps investment fees and costs low.

It also reduces the impact of behavioral errors. I believe that time in the market beats timing the market. I try to buy companies that I would be comfortable owning even if the stock market closed for a decade. 

To paraphrase Warren Buffett “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

I have discussed how I evaluate each company in detail. But I have not discussed how I find companies to research and potentially invest in a more comprehensive way.

Today I will share with you the general process I use to find companies for investment. 

One of the goals of my newsletter is to try and share how I operate as an investor. My goal is to help you become a more rounded investor, so as you can create your own investing process that would help you to achieve your investment goals and objectives. While I would hope that you would stay and follow my journey over the years, I would be happier if you end up as an investor who can follow their own system, and be an independent thinker that would take their financial future in their own hands.

I wanted to share with you the process I follow to identify companies for further research, and potential acquisition. 

My process has evolved over time of course, but there are a few places where I look for investment ideas.

The first place is the good old list of dividend aristocrats. It is a well-known and widely distributed list of S&P 500 companies which have managed to increase dividends for at least 25 years in a row.

Membership is restrictive, but I like the quality and the fact that this list includes great businesses and it is not too exhaustive either. The list has ranged from 40 to 65 members over the past 10 – 15 years. If you managed to learn about each company, you will likely have a list of companies that make sense to you from a business perspective. The next step is either to consider acquiring the ones that are attractively valued, or to wait for the right price for the companies that seem expensive.

I generally screen the list by focusing on growth in earnings per share, dividends per share growth versus valuation, payout ratios etc. 

The second place is the list of dividend champions, contenders and challengers. It is updated monthly, and includes over 800 companies. The number of companies raising dividends for over 25 years is double the Dividend Aristocrats list, because it includes companies that are not part of the S&P 500. It doesn’t have liquidity or market capitalization requirement either.

This list also includes a list of companies that have increased dividends for over 10 years or over 5 years. It has a lot of useful data as well.

The third place I look is the monitoring process, where I review dividend increases every week. I like reviewing the press release for nuance, and try to gauge the management optimism. Sometimes, they read that we are in a situation where it is business as usual. Other times they seem too optimistic. After reading it for a few years, you may get a hang of it too.

A fourth place is through checkups of activity, including press releases, large sudden drops or increases in share price etc. While I review the list of dividend champions, dividend aristocrats and my portfolio holdings, I still learn about major moves in other businesses that I may want to study.

A fifth place is by scuttlebutt. Basically, in my daily life, I look at products, services, ideas, trends etc. You can identify investable opportunities this way. This is also an interesting way to admit that a lot of the missed opportunities I have had have been underneath my nose all those years.

If you like a certain product or service, you should always check and see if there is a company behind it. If that company is publicly traded, you may want to put it on your list for research. This idea is inspired by Peter Lynch.

Sometimes we overcomplicate life. Some of the best investment opportunities are right under our noses. I am reminded about Wal-Mart, Target, Lowe’s, Home Depot, Microsoft, Apple, Starbucks, Hormel, Altria, etc.

I recently saw a video, about a very simple investing process. The eat them, drink them, smoke them and go to the doctor portfolio. You may check it out from here -

Sometimes, I like a company, and decide to review some of its peers. I may end up owning stakes in all of them.

The sixth place is primary the most dangerous one. I follow a lot of dividend investors and other investors. Sometimes I see a lot of them buying a stock, perhaps because they are blindly following each other. Or perhaps because they are all seeing a good value, possibly because the stock had a catalyst that makes it a value. It is dangerous to be a lemming and blindly follow others, because you may be following them into their bad ideas, lose conviction, and ignore their best ideas. Also, you are not learning much by following others. Groupthink may influence you, which could be bad for your investment returns. 

I believe it is best to have your own process to follow, because you are not at the mercy of others for ideas. Plus, no single investors out there, even Warren Buffett is right 100% of the time. If you follow someone, make sure to follow all of their investment ideas. However, also make sure you have your own process to decide for yourself if a stock is a buy or an avoid.

For example, Buffett received a lot of negative publicity a few years ago, after he sold his airline stocks. In my opinion, that was a bad decision in the first place. After he sold at a loss, everyone out there started saying that he has lost his touch. After Apple went up to $185/share however, everyone started signing praises for him again. Right now, he is sitting on an unrealized gain of over $100 billion, and few are saying that he has lost his touch. And overall, his gains on Apple are higher than his losses on airlines and IBM.

Today, I discussed six places I look for, in my quest for uncovering companies for further research. I believe it is important to have a good population of quality companies, before going to the next stage of screening, evaluating and ultimately buying good companies for my portfolio. 

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