As I am still in the learning process regarding stock investing, I make mistakes. Indeed, if you look at my portfolio (please wait a few seconds as it’s slow to load), you will probably notice some terrible stock choices. I basically fell into all the traps in which an amateur stock picker would have fallen: keeping a low quality stock and hoping it will recover, value traps, dividend yield traps…
However, investing in dividend stocks can be considered as the optimal strategy as it offers an efficient mix of capital appreciation and income. Therefore, I did some research, and from now on, I will only buy dividend stocks which have met most of the 27 criteria that I will detail below.
1. Blue-Chip Stocks
I will prioritize well-established, financially stable, and reliable companies. Blue-chips companies are mostly characterized by a well-known brand name and a solid reputation.
2. Brand Ranking
The brand ranking is an indicator of a company’s reputation and market presence. I will focus on companies that are ranked within the top 500 globally. To see the brank ranking of the company, I will look at this website.
3-5. The 10-Year Annualized Growth
A consistent growth trajectory is often seen as the hallmark of a solid company. I will pick stocks with a 10-year annualized growth rate over 10% in revenue, net income, and EPS.
6. The P/E Ratio
The P/E ratio of the assessed stock has to be below or in the range of its P/E sector.
7. Net Profit Margin
The net profit margin should have to be above 15%.This is a sign of a company’s ability to monitor its expenses. It also increases the likelihood of dividend distribution as a too-low net profit margin will put the dividend in jeopardy.
8. Dividend Payout Ratio
This ratio has to be ideally below 70%. Indeed, in case of profit drops, the company will still be able to distribute steady dividends.
9. Total Yield
What I call the total yield is the sum of the dividend yield and the share buyback yield. I will consider a total yield above 5 % as a good indicator of value creation.
10-12. The “Return” Ratios
The return on equity, return on assets and return on invested capital must be above 10 %. These ratios showcasing the company’s efficiency in managing its balance sheet and equity to generate profits.
13-14. Debt Ratios
The debt-to-equity ratio would have to be below 2 and the debt-to-assets ratio below 0.33. Keeping these ratios in these ranges shows financial stability and low leverage.
15. Price to Book Ratio
The price to book ratio has to be below 3. A too-high ratio may signify overvaluation.
16-17. Morningstar Ratings
I will also look at Morningstar’s fair value and the economic moat to assess the intrinsic value and the competitive advantages of a company. I will therefore focus on stocks which are undervalued and which have a wide/narrow moat according to morningstar.
18-19. Debt Rating (Long and short term)
The long term and short term debt rating from Moody’s will be checked to assess the company’s creditworthiness and financial health. I’ll aim to select companies which are in the investment-grade range.
20. Index Outperformance
I will focus on stocks which have beaten the reference index (mainly Nasdaq 100 or S&P 500) over the last 10 years.
21-23. Stability Over the Last 10 Years
I will prioritize companies that have demonstrated steady revenue, net income, and profit margins over the last decade.
24. Free Cash Flows
Free cash flows have to be positive and steady over the last 10 years. FCFs are a sign of a company’s ability to generate surplus cash, which can be used for dividends.
25. Dividend Consistency
Companies which are able not only to maintain their dividends but also to increase it over the years often indicates that the company is well managed and committed to shareholder value.
26. Decreasing Number of Outstanding Shares
A decreasing number of outstanding shares over the years can boost share value. Indeed, less outstanding shares can potentially lead to an increase the earnings per share andthe dividends per share and a decrease in valuation ratios (such as P/E or P/B ratios)
27. ESG Risk Rating
This criteria was not part of my strategy in the beginning. I have decided to add this 27th criteria, in January 2024. Thanks to this rating I can assess at which level the ESG risk could impact a company’s financial health. The risk assessment is performed by Morningstar. Morningstar assesses the ESG risk at 5 levels: Negligible, Low, Medium, High and Severe. I will focus on companies which are at “Negligible”, “Low” or “Medium” level.
After assessing a stock on the 27 above criteria, I will assign a score out of 27. I will then translate it into a grade out of 10, which will provide a clear indication of the stock’s potential as a dividend investment. By picking stocks which meet most of the 27 criteria, I aim to identify dividend stocks with the potential for capital appreciation and solid dividend payouts.
Leave a Reply