This is a back to basics method on how I look for stocks. There are numerous methods that other people use but some investors get too caught up in a stock’s current yield and don’t look at the fundamentals.
It’s all about finding sustainable growth.
While higher yields might be tempting, the best dividend stocks are those that increase their payout on a consistent basis. That’s why investors should look past the dividend yield and focus their attention on companies that have the traits needed to deliver steady dividend growth. That pursuit should enable investors to build up more wealth over the long term.
The characteristics of a great dividend growth stock
The best dividend growth stocks tend to share four traits:
- They generate lots of excess cash flow.
- They have a strong, investment-grade balance sheet with solid credit metrics for their sector.
- They have a healthy dividend payout ratio, which varies by industry.
- They have visible growth prospects, which improve the probability that they can continue expanding cash flow and their dividend for years to come.
So lets get into how to find one.
Price in its self means absolutely nothing so I’m first of not interested in that . I head over and search the 52 week low of the FTSE 250 , If your looking at US stocks you’d be looking and maybe the S and P or the DJIA. With a quick google of ’52 week low FTSE 250′ , I get all the companies showing on a list on the Investing.com website. From this I click on the fundamentals.
The only companies on this list that currently have my attention are the ones showing revenue and showing a P/E between 10 and 20. Any higher than 20 and on this list, is probably having a crash due to an over priced stock and its growth potential is limited, and any lower than 7 then the company is going to have very slow growth. So just from this sample screen shot we can eliminate everything except Biffa, Caffyns and Concurrent Technologies.
Now we have three companies to look at, the next part would be to see if they pay a dividend and is it in my remit. The amount of dividend that is acceptable all depends on person to person. Personally for myself I look for dividends around 3.5-8%. While on this same site I can click on the company and click on the financials then dividend. I’m also looking to see if the dividend has been falling or rising.
Biffa = 3.48% Caffyns = 6% Concurrent Technologies =3.38% From this screen shot I’ve whittled all these stocks down to just Caffyns.
From here the next stage for me is to find its intrinsic value. Before I dig deeper in to this company I need to know is it still over valued or is it now ripe for further investigation. To find this value I’ve written a simple version and can be found on my blog here: https://thesimplemindedinvestor.wordpress.com/2019/01/01/calculating-a-company-intrinsic-value/
Intrinsic value is 26.86p where as at the moment its 67.00. This means the stock is potentially still very much over valued and has lot more to fall yet. Out of the 250 potential stocks of the 20 on the screen shot 41 stocks are at their 52 week low and none of the 20 were hitting my investing criteria. So I then looked at the other half of the list, and I came across Xp Power . I done exactly as above and the intrinsic value came out at 6195p compared to today’s price 2000p. This company seems to be very much undervalued, with a dividend at 3.77%. On taking the intrinsic value it would have also been noted the growth estimates . You can see whether the company is growing sufficiently compared to previous years.In this case the estimated growth for the next year is 8.9% and last year it made growth of 18.90%. Over the next 5 years its expected to be 27%.
Quick catch up:
We’ve looked up today’s largest market caps at there 52 week lows (this changes daily). From here I then checked for the allowable (personal choice) PE ratios and then the dividend payers that also have revenue. This slims down the party numbers and whats left I then check their intrinsic value.
Cash flow is next:
To understand the true profitability of the business, analysts look at Free Cash Flow (FCF). It is a really useful measure of financial performance – that tells a better story than net income — because it shows what money the company has leftover to expand the business or return to shareholders, after paying dividends, buying back stock or paying off debt – Investopedia.
Its free cash flow has steadily increased from a negative position in 2014 at -2.5 m to today’s positive of + 5.8 m . This FCF also includes the paying of dividends. This is a growing company.
Is the company growing? are its debts growing? Over the last 4 years its assets have risen from 103 m to new highs now at 171 m . Its debts over the same period have gone from 22 M to now at 54 M. This equals a 68% debt.
On the basis of this the company looks like a good buy on most aspects. The one downside for me was the debt ratio , for ideally this would be 40% or less. A very important thing to do is to actually look up the company to find out what it does and how long the management have been in place. If this company is a lender of some sort then this debt % would be very good. There would be two methods I would now enter into this company. The first is I would allocate a % of my buying funds purely for this purchase, for example 6% of my portfolio. Of this 6% I would break this up into 3 parts. These three parts are used to dollar average in, in case the stock drops lower. My second entry point (as long as the fundamentals still hold) is when the stock drops another 30% . For example if you put on 1k and it drops to 0.7k that would be the second entry, and the third and last the next 30% drop. The timing in the first entry would be a weekly engulfing candle. Please note I know everyone is different on the way they choose their stocks and this is just one way of looking at it.
After all this there is a simpler way and that to use a stock screener. Though its good to know how to do it yourself so you know what your buying and so your better educated.
Thank you for reading.