Although I think of myself as investing in defensive value stocks, I could just as easily call them dividend growth stocks.
That’s because finding companies with a good combination of dividend yield and dividend growth is absolutely central to everything I do.
One thing I’ve learned from putting dividends at the heart of an investment strategy is that dividend investors typically need longer time horizons than investors who focus on capital gains.
Companies usually pay dividends every six months, so a dividend investor who buys into a company will often have to wait several months for their first dividend payment. In the weeks and months between dividend payments and quarterly results, there is very often nothing for the dividend investor to do.
Capital gains, on the other hand, occur almost every second of the trading day (as do capital losses), so there is always something for the investor focused on capital gains to get excited (or depressed) about.
As a result, the investment time horizon of dividend investors should almost always be measured in years rather than days, weeks or months.
This fact should have a profound impact on the way investors select dividend growth stocks.
Personally, I’m quite likely to end up holding a company for anything up to ten years or more, so I am of course very interested in whether a company is likely to sustain and grow its dividend over that sort of time frame.
For me, the best way to build up a picture of what a company might achieve over the next ten years is to look back at what it achieved over the past ten years.
There are quite a few steps involved, but the first few are the most important and I described them in some detail in December’s Master Investor magazine: