Dividend Growth Investing MethodologyAdvice to the Advisor
Dividend growth investing, as seekingalpha.com explains, involves the researching and careful selection of high-quality companies that are capable of growing profits for extended periods of time and that pay shareholders sustainable dividends that are regularly increased on an annual basis.
“The U.S. stock market has been one of the greatest long-term wealth generators in history, recording a compound annual growth rate around 9% since the late 1800s,” simplysafedividends.com reminds investors. “However, as with most things in life,” the authors caution, “actually reaping the potential rewards is much harder said than done.”
Sheaff Brock Managing Director Dave Gilreath agrees—dividend growth investing is much harder said than done. Gilreath details the four stages of the firm’s proprietary investment methodology and portfolio construct for dividend growth investing:
- Technical analysis at a sector and industry level in order to determine sector and industry weightings
- Fundamental value scoring of each stock on variables including free cash-flow, revenue stability, profitability changes and trend, leverage, stock price volatility and correlation, and earnings surprise persistency
- Downside risk measurements
- Using relative valuation metrics to analyze the standard deviation of each stock’s price-to-earnings ratio relative to its average historical value and industry value
With the flood of baby boomers entering retirement, Gilreath sees dividend growth investing in the form of blue chip dividend growth stocks “taking the baton from pure growth stocks in 2019.”
No need to turn to Hollywood in an attempt to understand “What Men Want” (the latest film offering), or “What Women Want.” Instead, Sheaff Brock’s Gilreath suggests heeding the caution of Warren Buffett: “Owners of stocks too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well.”
Advisors may do well to focus their clients on the concept that dividend growth investing has the potential to provide what they really want—wealth-building and income that grows over time.