How To Invest In Dividend Stocks

Most situations concerning dividend investing discuss how a portfolio should be constructed, how different types of non-correlated assets should be included and how to re-balance from time to time. I realize that I have never really written anything about how to handle influx of new funds in a dividend portfolio and how to maintain asset allocations accordingly. As an investor in the accumulation stage, I tend to invest a certain amount every month. The amount of money goes first to stocks which have passed the following basic screen: 1) The company has raised dividends for over one decade 2) The P/E ratio is less than 20 3) The dividend payout ratio is less than 50% 4) The dividend yield is above 2.50% This screen decreases the total universe of investable dividend growth stocks from 300 to a more manageable number. In the next step I analyze the companies which are on the screen and basically look for qualitative and quantitative factors. In terms of quantitative factors, I look for growth in earnings over the past decade and stable trend in returns on equity. The qualitative factors are highly subjective, as they incorporate my stock market experience to date. I try to understand what the company does, whether it has any competitive advantage and whether it would be able to generate earnings growth in the future. Without earnings growth, no company can afford to grow dividends for more than a few years. If I had already analyzed the company, I just review my previous work and use it to compare the last stocks remaining to each other. After a list of several stock candidates is generated, I check what my allocation in each one of them is. In a dividend portfolio of 40 stocks, I do not want to see a company that has more than a 4% portfolio weighting. Even if such a company is priced very attractively, I would not invest in it, as long as there are other candidates which could be purchased at bargain prices. Most of the times however I end up owning miniscule positions in stocks which were trading at bargain prices a long time ago, but which have since been overvalued.... Read more