Investment Research Process
Our investment research process is designed to throw out companies that are not attractive as soon as possible, thus enabling us to spend our limited time performing detailed research on potentially more interesting dividend income opportunities.
As a Dividend Income Investor, I am focusing on dividend paying companies, which have a history of an uninterrupted dividend payment track record as well as uninterrupted dividend growth.
Of course, we do not blindly purchase shares from any company with a high dividend yield without first understanding their business as well as checking and understanding a number of different financial characteristics of the companies.
Analysing the metrics
In order to identify the very few companies that we believe represent sustainable and real long term dividend income growth, our investment research process determines the most attractive investment opportunities by reviewing a broad range of metrics, including:
- earnings per share – EPS
- return on equity – ROE
- dividend payout ratio – DPR
- dividend per share – DPS
EPS – The Earnings per Share indicator is calculated by dividing the total amount of net income for one year to the total number of shares outstanding. In addition, I prefer companies with a price earnings ratio of less than 12.
I am normally looking for an improvement in EPS in at least seven of the last 12 years. A company that cannot increase its EPS overtime will not be able to sustain the growth in its dividend payments to shareholders.
Click Here for a short video tutorial on earnings per share.
ROE – Return on Equity is calculated by dividing the total amount of net income for a given year over the amount of owner’s equity on the balance sheet at the end of the previous period.
I do not look for specific numbers in this indicator, but focus exclusively on its trend. Relevant stocks will have a flat or slowly increasing ROE over time, which is fine with me. A decreasing ROE over time is bad news.
DPR – I calculate the Dividend Payout Ratio by dividing the DPS over the EPS. I am generally looking for a DPR that is below 50% in most companies.
I would consider buying a stock with a much higher DPR, if a company has been able to maintain a higher DPR over time due to the nature of its business or the nature of its legal structure.
In general, a rising DPR concerns me. This shows to me that there is not much room left for future dividend growth. Alarm bells start ringing with regards to stocks that have an unusual high DPR which may indicate a high risk for prospective dividend cuts.
Click Here for short a video tutorial on dividend cover and dividend pay out ratio.
DPS – Dividend per Share: I generally look for dividend increases of at least five times in the last 12 years and at least 12 years of uninterrupted dividend pay-outs. In fact, the longer the better!
These type of companies also show a management team that is committed to enriching their shareholders and not just enriching themselves.
In a time where large total CEO compensation runs in the millions regardless of company performance, it pays to know that the executive team is committed to sharing the company’s wealth with its owners – the investors.
Click Here for a short video tutorial on dividend per share.
What is the significance of 12 years?
A consistent record of earnings growth is very difficult to achieve, let alone sustain over a long period.
Our investment research process aims to analyse the history of each company’s financial results over an as long as possible period – more often than not two economic cycles take place in any 12 year period.
A successful earnings history covering several economic cycles shows us that a company can survive the hard times and prosper in the good times allowing us to form a judgment regarding the quality and cyclicality of the company’s earnings and dividends.
Companies that have been able to have increased their dividend payments for at least five times in the last 12 years, without having cut their dividends in the remaining years, clearly have a solid business model.
These types of companies have a proven track record which shows that their business model is able to consistently support an increase in dividend payments to shareholders.
A company which hasn’t been able to at least pay a dividend without cutting it substantially in difficult times is automatically off my radar. Also, I won’t touch a company which has exhibited a lot of fluctuations in its dividend payments over the last 12 years.
After checking the trends of EPS, ROE, DPR and DPS, and, only after we believe we have found a high quality company able to increase its dividends going forward we finalise our investment research process by performing our valuation test in order to only consider purchasing shares in those companies that are at that particular moment in time historically undervalued.
The outcome of our investment research process is than summarised in a consistent format within our Dividend Income Report, and disseminated exclusively to our subscribers. Click here for a sample issue.
If you have not yet subscribed, please access the premium content page for more information.
- Dividend Income Report – click here for a sample report
- Subscribe Now
- Go to Diversification
- Return from this page to Investment Plan
- Return from this page to Home