Dividend Growth Investing (DGI): Let's get it started

Thursday, Jan 10 2019 by

OK, here I want to share with you the strategy for my new income portfolio. I know that I will probably be the exception here at Stockopedia since my impression is that most of the subscribers tend to invest with a shorter horizon and are more active investors with more trades during the year. But maybe there are some people out there who get some inspiration from what I am doing.


The strategy itself is inspired by Thomas Cameron and based on dividend growth investing (DGI). Tom Cameron is maybe not so well known. But his approach is in my opinion very smart. It goes like this: He seeks stocks which are paying dividends for at least 10 years and did raise the dividends for at least 10 percent on average in these last 10 years. You can read more about his strategy here: https://www.dividendearner.com...
Needless to say that this is only the first step. You than have to do further research.

So I adopted his strategy, using a DPS growth CAGR of 10 or more percent but only for the last 5 years. Thereby I think I can sort out companies which are lowering their distributions in the last years. The dividend streak should at least be 10 years with no dividend reduction or cut, and in at least 8 out of the last 10 years the dividend should have been increased. I do the same for earnings, which means the EPS growth CAGR for the last 5 years must be at least 10 percent and I want an EPS streak for 10 or more years. Next I take a look at the PE ratio which should be below the 5 year PE average. I include a lot of other ratios in my considerations, e.g. the payout ratio, a minimum yield of 2 percent, the FCF and operating margin, the liabilities or the long term debt compared to net profit before extraords. So this is not a pure DGI strategy.

My investment horizon is around 20 years. My intention is to hold the companies which I choose during all those years and build up an extra income stream for my retirement and benefit from the yield on cost. Nevertheless there are some "selling-triggers", e.g. a dividend decrease or if too many ratios don't look appropriate anymore.


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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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24 Posts on this Thread show/hide all

Benjamin Graham 11th Jan 5 of 24

In reply to post #434988

Actually i am a longterm value investor. That's what suits me most. And of course Benjamin Graham is a godfather of value investing, so my nick is kind of reverence to him.
Yes, BRK... This is one example that always occurs when it comes to dividends. Buffett himself loves dividends and advises to buy stocks that pay dividends. But for his own company his view is that he knows better things to do with that money than his shareholders. Well, who are we to contradict such a living legend who outperforms the market since decades?

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Benjamin Graham 11th Jan 6 of 24

In reply to post #435263

Thank you! I will post my updates but my strategy is more kind of boring and slowly. So no Minervini buying and selling, no technical analyzes, not that much action in my portfolio. You better expect news every quarter rather than every month or week. ;-)

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jjis 11th Jan 7 of 24

Hi, thanks for your post - you are not alone. I have been following a similar approach myself for many years now and indeed have been living off of some of the growing income for the last ten years too. I note you are US based and the service you referenced is also US & Canadian centric. I also offer similar metrics for identifying Income growth stocks in the UK, although at a much more reasonable price which may or may not be of interest to UK based investors.

I have run a portfolio based on this Scoring system that has done OK in the nearly 4 years it has been running with annualised Compound returns of 12.2% compared to 3.6% for the FTSE All Share over the same period. This portfolio is re-screened & trades on a monthly basis these days. The Score can also be used to identify quality income growth candidates for buying and holding for the long term too, which is what I tend to do myself. So I would share your enthusiasm for this approach & I think it should serve you well in the long run although I'm sure not everyone would agree.

Good luck with your investing.
Regards, Jamie



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mmarkkj777 11th Jan 8 of 24

In reply to post #435293


Well Warren is a hero of mine and I agree fully with that rationale, he does know better, but he has done a share buy back and the shares have not really been rising for some time. I'm still holding and being patient and hopeful, but I need to keep holding for a reason. As its not paying a div, it needs to start rising again or (like he would do), consider my resource allocation and ensure its allocated to appreciating assets.

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Benjamin Graham 12th Jan 9 of 24

In reply to post #435348

jiis, congrats to your success. Living off of the income stream and paying some bills is one of my goals in the long run. But as I said, I aim to invest for 20 years before I will do so. Until then I am in the accumulation phase.

By the way, I am not US based but invest in a lot of US stocks, simply because here you can find most of those stable dividend growers.

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jjis 12th Jan 10 of 24

In reply to post #435463

Thanks BG - good luck with your journey. You and others may be interested in this site too by someone who is trying to do the same and has links to Dividend Champions Lists from around the World - http://dividendlife.com/uk-div...

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Taff6 12th Jan 11 of 24

Nice discussion post BG

A few ideas for those income seekers out there


Global dividend list as screened for by ishares sorted by yield

The UK is looking good at present  


Here’s the iShares UK Dividend UCITS ETF sorted by Stockranks


stockrank >40 has beaten the FTAS since inception 


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Benjamin Graham 14th Jan 12 of 24

In reply to post #435368

I totally agree with you. Berkshire doesn't look cheap at all and I would not buy them right now. That's why I decided to go for an income strategy. Nevertheless Warren Buffett is the most successful investor of all time in my eyes.


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dangersimpson 14th Jan 13 of 24

Be wary of basing a strategy on dividend growth. It sounds like a sensible strategy and even produces a very slight outperformance compared to the broad market (using US data back to 1973.) But it slightly underperforms a simple high yield strategy. You would be better off ignoring dividend growth rates if you want to invest based on dividends.

However both dividend growth & high yield strategies massively underperform other value strategies such as Shareholder Yield (Dividends + buybacks - share issuance) or Earnings Yield (EBIT/EV).

If you are a value investor who is going to the trouble of picking stocks based on value criteria you are leaving a shed load of money on the table by using dividend growth metrics in your decisions no matter how sensibly motivated they are.

More details here: https://mebfaber.com/2017/04/26/dividend-growth-myth/

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Benjamin Graham 14th Jan 14 of 24

In reply to post #436303

As a longterm investor I reinvest dividends and use them plus a monthly savings rate to purchase more shares. Later I want to rely on yields to produce a stream of income from my investments without selling the shares I own. I think in the end it's going to be a mixture of dividend growth and high yielding shares. You can easily find out which strategy will be more powerful by playing around with this calculator: https://tools.mhinvest.com/mhi... Dividend growth shows it's full power in the long run. That's when the yield on cost or compund interest comes to its full advantage. But it's definetly more a marathon and not a sprint.

As I described before the dividend figures are not the only measures which I take into account. So it is not a pure DGI strategy but yes, the goal is to get an income stream in the end. As I said this approach is not for everybody and I am well aware of the friction between the "dividend gurus" and those who prefer companies that do not pay dividends. The main thing is that you have a strategy and feel comfortable with it.

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dangersimpson 15th Jan 15 of 24

In reply to post #436333

I like dividends. As a discretionary share-picker then they have some great qualities: they confirm that a company generates real FCF, the discipline of paying them can keep management from wasting shareholder capital, and increases of dividend can signal managements' confidence in the future far better then mere talk. Also in the UK with generous ISA tax allowances then the argument for no dividends on a net return basis is nowhere near as strong as for US based investors who face a harsher dividend taxation regime.

But none of these qualities are inherent to dividend growth strategies, or necessarily high-yield shares taken together as a set.

I also understand the psychological attractions of receiving an income from shares that just appear in your account rather than having to take action to fund expenses. But all the evidence is that you pay a high price for that comfort. In the marathon, it is the highest compound total return that you put into the calculator that wins. By relying on dividend growth as a value strategy you are generating lower compound returns.

Take for example the numbers from Faber's study with a nominal £100k.

You could invest in a dividend growth strategy, reinvesting all you dividends and in 30 years you would have £3.7m. With say a 4% terminal dividend yield that could generate you £150k year income. Not bad, and not many people would complain.

But I invest in a shareholder yield strategy and in 30 years I have £7m. Or alternatively I could have retired 5 years earlier on the same £150k income as you.

So, while your dividend growth strategy may have given you a nice warm feeling of seeing the dividends arrive in your account, I've had 5 years of warmth from the sun, sipping cocktails on the beach while you've been in the office ;-)

I agree that you have to find your own strategy and be comfortable with it. If you need the comfort of the dividends to enable you to stick with a value strategy through the inevitable years of under-performance then that is much better than panicking and selling, or changing strategy and chasing growth stocks. There lies even greater underperformance! You could argue though that a simple high yield strategy would be equally easy to find comfort in and has generated higher total returns than a dividend growth strategy so the logical conclusion is to go for a high yield strategy.

I'll take the higher returns of the pure value strategy any day, and work hard to develop the mental strength to stick with the strategy. The rewards of doing so are just too high too ignore.

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JohnEustace 15th Jan 16 of 24

Terry Smith takes a contrary view on the value of dividends.
“There seems to be something so alluring about dividend income that it often seems to lead investors to abandon common sense or be encouraged to do so by the investment industry.

For example, how many times have you heard it said that the majority of returns from investment in equities comes from reinvestment of the dividends? This assertion is usually accompanied by charts which show the difference in returns from an index with the dividends paid out versus one where the dividends are reinvested. Unsurprisingly, the latter has a significantly higher return. But this is not the same as demonstrating that the majority of returns come from reinvested dividends. In fact, they come from retained profits.”


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andrewdb 15th Jan 17 of 24

You need to be aware that the criteria
"... stocks which are paying dividends for at least 10 years and did raise the dividends for at least 10 percent on average in these last 10 years."
looks to be basically a momentum stategy - ableit based on a companies willingness and ability to pay dividends.
there is evidence that a momentum based on price screen does have a positive effect, so it would not be surprising to see some positive effect from this approach.

I would be very aware of 'earthquake' risk - when that dividend stops.

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Benjamin Graham 15th Jan 18 of 24

I do not want to degenerate this into a debate on principles. There are different approaches and strategies (and I've already tested one or the other before), and everyone should find the one that suits him best and that he believes in. The thread here is just to explain my approach, because I've found out for myself that dividends are safer and more predictable than the price of a stock. And the regular payments give me some composure in turbulent times and make it easier to go ahead with the strategy. I try to own a bunch of stocks (probably 20-25). So if one fails it's just 4 or 5 percent of my portfolio and it will be replaced by another one that fits the criteria.  I also own a global ETF that consists of stocks and bonds. That's my kind of assett allocation.

If you do not believe in dividends (growth) or consider other strategies to be better – that’s fine, then go ahead and follow that strategy. But for those interested in longterm income investing, the reporting of my experiences and development in my strategy every three months may be of interest. That's the beauty of this approach: I do not have to look at my shares every week or every month, and it's relatively uninteresting whether the stock is 20 percent higher or lower than the buying price. Will I be sucessful in the end? I don’t know yet. Will I beat other strategies? I don’t know yet. Ist that important? Not for me.

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mojomogoz 15th Jan 19 of 24

Interesting discussion.

I have no commitment to a quantifiable style of investment. My MO is to look for what I perceive to be dissonance either at stock or macro perspective. In that I think there is a good opportunity today in UK large caps. As I'm I deciding to deploy cash rather than redeploy from other stocks my benchmark for this is cash and shorter term than my general approach (I tend to look several years out..short term opps fine but I like to see a persistence to the opportunity rather than resolution of a single revaluing anomaly...just a personal thing).

I think the shades of disagreement above are really around foresight and using data as an aid to foresight. Obvs foresight can't be a factor as you would all then be billionaires from original £100 stake ;) Hence the phrase 'hindsight millionaire' which due to current norms must be inflated to 'hindsight billionaire'. We all are! I prefer the phrase hindshite personally.

Anyhoo, a few comments re the above and foresight:

Dividend growth has the achilles heal of (in a relative sense) high expectations built in to some stocks that they will produce this form of growth. The let downs will hit hard relative to the wins...asymmetry...not dissimilar from quality investing in that regard

Pure high div yield rather than div growth may be better as straight yield captures value and recovery cycle better. Div stocks that have stumbled as so price and even cash div yield may have been cut. This is capital cycle investing and seeking to get them when they are down.

Share count may provide foresight in that it screens out stocks that have a ROC underlying weakness or are acquisitive (for big stocks that already have a lot of market share acquisition is a game often unfavourable to shareholder returns).

I think the share count addition needs amended looking forward due to the tendency in these super low rates times of many companies to issue debt and support highish yield or share buyback. Great wheeze until recently but an inevitable problem be it a fast disaster (with signif macro and rate environment change) or just a slow bleed as the excess becomes a long term burden. I'm more latter than former as I don't think we have fast disaster and everyone is playing the wrong disaster movie in their heads...but I don't really know...precedence says we don't have the same bear/crisis following on...it at least skips a beat.

My ersatz current div screen looks for high yield and then high ROIC a la Greenblatt's magic formula with a debt sustainability thrown in plus, very unusually for me, a charting element thrown in (I'm looking for similar chart over 2018 with an indiscriminate sort of decline from peak...its written all over UK large caps). Remember though I am being short term and thinking relative to cash. So this is not a long term div pay out angle.

Why magic formula-ish? I think this is just a higher quality proxy to foresight. Not perfect though!

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mojomogoz 15th Jan 20 of 24

Any of yielders following this discussion...got a view on Standard Life Aberdeen (LON:SLA) ?

Obvs it doesn't fit the screen I mentioned above. But its an interesting proposition that I don't have a view/position in. The yield on stocko is too high by c.1.5% as it doesn't adjust well to corporate actions around sale of SL insurance business.

Historically, cash per share has outperformed eps so sustaining an infeasibly large pay out ratio. With sale of insurance business I'm not sure whether this position is threatened now. It looked on quick read to me that the cash out performance may be a function of reserving excess coming off of actuarial factors.


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dangersimpson 15th Jan 21 of 24

In reply to post #436543

Principles matter in investing though. While, the real success for you is if you reach your long-term financial goals without undue stress along the way, when you write a public article you are at least suggesting in some way that this might be a good idea for others to follow. And in that I think it is right to question the foundation upon which the strategy is based. A proposal where the tenets cannot be questioned is a religion not an investment strategy!

You consciously accepting lower returns for a strategy that you find psychologically easier is great self-awareness, just that others should be aware that you've made that trade-off. I won't labour the point any further because I get that this is more of a personal strategy for you than a recommendation that others should follow it.

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Benjamin Graham 15th Jan 22 of 24

In reply to post #436608

You can read my disclaimer/disclosure in the original post that this is not an investment advice. Besides here at Stocko exist a lot of strategies from different gurus/investors. If there would be the one strategy that beats them all, why should the others still be listed? There are a lot of opinions, approaches and preferences out there when it comes to the question, what to do with your money. And that's fine. None of them should be a dogma. Everybody picks the one strategy he is convinced most and sleeps well at night.

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mmarkkj777 17th Jan 23 of 24

Hi Benjamin,

If I asked 10 investors for an approach, I would get at least 11 different theories.

I have a section of my folio for long term hold stocks, preferably paying a decent dividend. Please carry on reporting your approach. I’m interested ( as I’m sure many others are).

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Benjamin Graham 17th Jan 24 of 24

In reply to post #437388

He he, mmarkkj777. I know such statements about lawyers, but you are certainly right that it is true for investors as well. Thank you for your encouraging words. I'll defintely keep up reporting about my strategy and portfolio development. But as I said this will not happen too often since my approach is some kind of nondescript. So no fancy stuff and the next big thing in shares. ;-)

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