The main metric we use to identify good Dividend Growth Investing candidates is our Dividend Score. The score is both backward and forward looking. Past performance and track record gives confidence and guides expectations regarding the future, but only the actual future performance will reward an investor.
The Dividend Score is instrumental in assessing the current attractiveness of a dividend growth stock and the likelihood that the dividend continues to increase in the future. It is computed base on several metrics:
- Current Yield
- Years of consecutive dividend increases
- Dividend growth rate over various timeframes
- Next Year and Next 5-Year Earnings growth forecasts
- Payout Ratio relative to earnings and to free cash flows
- Financial health indicators
The decision to purchase a stock is made based on a strong Dividend Score AND an attractive valuation.
- A dividend Growth Stock is only worthy of consideration for a purchase if its current Dividend Score is above 60. A score above 70 is considered strong. Among the 375 stocks in David Fish’s cleaned CCC list as of July 21, 2012, the stock with the best Dividend Score was Emerson (EMR) with 93 and the worst score was for Frish’s Restaurants (FRS) with 13.
- An attractive valuation can be assessed by comparing Price/Earnings to their historic value and their fair value. One tool among many that we find extremely useful in this regard is FastGraphs.