Investment Strategy

As a Dividend Income Investor, my investment strategy involves buying shares in quality dividend paying companies at “bargain prices” i.e. those that are historically undervalued.

Undervalue, in this context, represents a situation in which a company’s dividend yield is historically high in relation to the bottom of a major share price decline.

After buying shares in such companies, I will keep them while they continue to meet our investment criteria as laid out in our investment research process.

In fact in that case, I would almost “forget” about them and let the dividends reinvest automatically into more shares. I would consider holding forever in those situations.

There will be times though, when we believe few really excellent investment opportunities present themselves. In waiting through the ‘lean’ times the Dividend Income Investor may be in cash, or similar, preparing himself to take advantage when the times of abundance returns.

When to sell?

While I do not intend to rebalance my share portfolio on a regular basis, since this will increase my trading costs, there are moments that I will consider selling shares.

As a general rule, I would sell shares in a company which either unexpectedly cut their dividends substantially, or eliminate their dividend altogether, or have become historically overvalued.

Overvalue, in this context, describes a situation in which a company’s share price is priced “high” with a historically low dividend yield, i.e. the dividend yield is relatively low in relation to the top of a major share price increase.

I may consider selling a stock once it starts decreasing its dividends; I won’t sell simply because a company whose stock I already own does not raise its dividend, but I might not add any more fresh money into this position.

What to buy?

As a Dividend Income Investor, I intent to seek out, research and buy companies which have a history of consistently increasing their dividend payments going back over as many years as possible.

I do intend to diversify across sectors as well as geographies, without being too overweight in any particular sector, which could prove to be easier to say than achieve.

I will be looking for both UK listed companies as well as companies listed elsewhere, as, currently, there are only five UK listed companies with a track record of consistently increasing their dividends over a period of more than 25 years.

I will be looking for dividend paying companies with a long term track record and with an average annual dividend growth of at least 5% (which is above the average long-term inflation rate).

Not just because their dividend yield is high!

When considering a “high yielding stock”, it is important to realise that I do not just focus on high dividend yields.

A company with a historic 10 per cent dividend yield when the average yield in its sector, or the stock market as a whole, is just 3 per cent is most likely a stock, for which the market is telling you that there is a high chance that the dividend payment would be cut and your yield would decrease.

Instead, I would rather consider buying shares in a company that pays me between 3 and 5 per cent currently, at a time when ‘fixed’ income can provide me with a yield of just 1.0% – 2.5%, BUT which has a long term track record of dividend increases of say 7.5% or more per annum with good prospects for a similar performance in the near future.

How does the ideal dividend stock look like?

The ‘ideal’ dividend stock candidate for purchase would be one showing:

  • a long track record of paying dividends, with

  • an above average dividend growth, with

  • an above average yield, i.e. its share price is currently historically undervalued

  • whose dividend payout ratio does not exceed 55-60% at the time of purchase

Such a company would warrant substantial further research.

What next?


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