Investing Strategy: Focus on Rate of Dividend Growth
24 August 2006For those of you who like to have some of your retirement money invested in individual stocks, Kiplinger’s has an article focusing on what is a somewhat more conservative variant of the “growth stock” category - stocks that are annually increasing their dividends at high rates. The strategy is advocated by Rick Helm, who runs a fund called Cohen and Steers Dividend Value (DVFAX).
Basically, you just look for companies that are raising dividends at the rate of twice inflation or more - probably around 6% per year now. There are plenty of big, solid companies that meet this category - Helm identifies Proctor and Gamble (PG), Aflac (AFL), and Wells Fargo (WFC) as meeting this category.
The idea behind the strategy is this: management of a company does not raise the dividend unless they believe the company is doing well. If they’re worried, they generally keep it the same or even lower it. It’s a good point - many investors focus on things like the public filings of whether management is buying or selling a stock as a guide to how confident they are in the company. But dividend growth is actually probably a better “canary in the coal mine” that will tip you off sooner as to whether there are going to be problems, because managers often own options instead of stock or will avoid selling when they know there are problems for fear of insider trading issues.
The other thing I like about this strategy is that it pretty much keeps you to companies that are solid financially, while letting you find ones that are growing as well. Companies that are not on a solid financial footing do not pay high dividends. An AOL or a Google that is depending on future earnings growth rather than a high earnings base today has the growth - but not the underlying strength in its business right now. So looking at dividends is a good way of letting you pick the best of the bigger, traditional companies that aren’t subject to as much risk.
I’m not so sure about investing in this guy’s fund, just because it is only a year old and only has $11 million in assets. You can view the details about it here. If you want to try this strategy but don’t want to buy the fund, they have to disclose major holdings - so on that page you can see that he’s also picked General Electric, Johnson and Johnson, and Baker Hughes. If you want to use the strategy but don’t want to spend as much time poring through stocks and running the numbers, just look at the disclosed holdings and research those stocks specifically to see if you like them.
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One Response to “Investing Strategy: Focus on Rate of Dividend Growth”
August 28th, 2006 at 9:46 am
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