Stock Picking Strategy

Here I’ll post my current stock picking strategy. This is my initial screen to determine if a stock fits my ideals as a dividend growth investor. This is the minimum that a company must follow for me to then further analyze to decide if I would like to invest and at what price would be an ideal entry.

Dividend Beginner’s Stock Picking Strategy

For Canadian Companies (Listed on the Toronto Stock Exchange (TSE))

1. The company must have paid increasing dividends for a minimum of 10 years

WHY: A company that has paid increasing dividends for 10 years already is likely to continue this trend and unlikely to break their streak. It also shows that management values their shareholders.

2. The stock must yield a minimum of 2.00%

WHY: As a dividend growth investor, I like large dividend yields. 2.00% is pretty low, and anything below that is very uninteresting to me. However, with 2.00% as a minimum, combined with Metric #5, it will at least have a decent yield given some time with a large growth rate. I’d like to aim for above 3%, but won’t knock a stock for going a little below that.

3. The stock must have a P/E (TTM) no higher than 20.

WHY: Paying 20x what a company currently earns is a lot. Unless you know the company will be making a ton of cash and has incredibly future prospects, paying more than 20x earnings could be dangerous and may make it difficult for the stock price to appreciate. Speculating is not what I got into the dividend growth game for, so I’ll leave that to the speculators who wish to purchase stocks at a P/E of higher than 20.

4. The stock must have a 10 year YOC of at least 6.00% 

WHY: The whole point of dividend growth is so that later in life you can reap rewards from the seeds you planted TODAY. If I’m not getting a yield of at least 6% in 10 years from now, then you’re not generating a ton of future cash flow in relation to your investments today. This is one of the most important metrics for my dividend growth.

5. The company’s dividend payout ratio must be below 80%.

WHY: 80% might even be a bit on the high side, but if the company is paying out more than they earn, there’s no chance they could keep up with it over an extended period of time. What will they do if the payout exceeds earnings for too long? They CUT the dividend. You never want one of your dividends to be cut. It’s a great sign that trouble is to come and you might no longer want to be a part of that company as a dividend growth investor.

  • Hello DB, really enjoy your blog and planning on transitioning from my Betterment account (Roth IRA) to a Dividends income strategy similar to what your doing now using a Roth IRA account which is similar to your TFSA in terms of being tax friendly.

    Haven’t decided on a broker just yet. Leaning towards TradeKing or Charles Schwab at this point

    Currently, the max yearly contribution limit for an IRA account is $5,500 USD, so my plan is to contribute on a bi-weekly basis $211.53 USD ($5,500 / 26 weeks).

    If you have multiple companies that meet the screens, how would you go about allocating the dollar amount to purchase these companies? Do you wait until you have a certain dollar amount before purchasing, e.g. $1,000 per company?

    Thanks in advance.

    • Hey TF,

      I’m very glad to hear you enjoy my blog and hope that it can offer a little guidance in the DGI methodology.

      It’s great that you have a plan like that to make bi-weekly contributions. Big kudos off to you. Having a plan and taking the emotion out of it, or not seeing that money in an account you can take it out of is a great way to go.

      If I find companies with similar metrics, I always look at which has a safer, higher growing dividend with a lower payout ratio; then look at what the company has planned for the next couple of years to make a decision.

      I usually always have cash waiting in my account to distribute once I’ve made a decision, but I tend to invest roughly $1, 000 to $2, 000 depending on how I feel about the company.

      Thanks for commenting,
      DB

  • DB,
    This is a great list for picking stocks. I am currently working on my rules for investing in dividend stocks and your rules make a lot of sense.
    Good luck with your dividends,
    DividendMonkey

    • Hey Slav,

      Welcome to the DB blog. #3 and #5 both look at different metrics which mean different things. The P/E metric is more of a valuation metric where you can see how much the stock is trading relative to it’s earnings, and determine whether it’s expensive or not in this area. The payout ratio measures the dividend safety relative to the company’s earnings. A company paying out over 100% of earnings will have trouble growing, might have to take on debt, and is overall not a good thing in any way.

  • Fellow Canadian and loving the info here. Thanks for sharing such great insight. Just wondering if you have compiled a page for resources and how you go about discovering the above metrics about potential stocks/companies?

    • Hey Ryan,

      Always glad to meet my fellow Canadian investors. I currently don’t have a resource pages, but you can check out my “Lessons” page.
      You can check your brokerage, or Google Finance to determine the above metrics. I get most of it from CIBC Investor’s Edge.

  • Just found your site. Well done on starting early! Got my kids starting in the teenage days with Computershare and I hope they will continue in your footsteps into adulthood.

    Your second rule will rule out companies like CNR or MRU … which have significant dividend growth compared to many other companies out there.

    Cheers.

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My publishings on dividendbeginner.com references an opinion and is for information or entertainment purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. I am not responsible for any decisions you make concerning finances, taxes, or investments. You must perform your own research and always take caution when extending capital.