You don’t have to be a rocket scientist to invest in dividend stocks, but if you want to do more than just buying stocks because they have a high yield, then there is quite a lot you’ll need to know.
So in this article, I break down everything I know about dividend investing into five basic steps. These steps form a solid foundation upon which everything else in an investment strategy can be built.
You can read the full article on my new website at UKDividendStocks.com:
Two months ago I wrote a long article about Discounted Dividend Models and how I’ve started to use them to value companies.
I then added a template to my investment spreadsheet so I could quickly build a standardised dividend model for any company which I could then refine and expand upon later.
After that I spent several weeks hammering out one dividend model after another so that I now have reasonably detailed models for all of my portfolio‘s 30 or so holdings.
As I now have a lot more experience of what it takes to build discounted dividend models in the real world, I thought it would be useful to outline some of the major pros and cons I’ve run into while using this approach.
Continue reading “The pros and cons of discounted dividend models”
As a value investor, I’ve spent most of the last ten years valuing companies using valuation ratios such as dividend yield and the cyclically adjusted price-to-earnings ratio (CAPE or PE10).
However, I now think such backward-looking ratios are inferior to the more theoretically correct Dividend Discount Model (DDM), which values companies based on an estimate of their future dividends.
So in the rest of this blog post, I’ll explain what the Dividend Discount Model is and how you can use it to guide your buy, sell and position sizing decisions, especially if you’re interested in dividend growth stocks.
Warning: This is a long blog post so you may want to get a cup of tea and a slice of cake before you settle in for a long read. Or, bookmark this page and come back to it when you have a spare moment or three.
Continue reading “How to value shares with a Dividend Discount Model”
Over the last ten years or so my investment approach has moved steadily towards higher quality companies, yet hopefully still purchased at attractive valuations.
This takes quite a bit more time because I have to analyse companies in more detail, but for me this is the right decision as I prefer investing in successful businesses which align with my Quality Defensive Value criteria.
However, during the pandemic, I found that researching potential new holdings for the UK Value Investor portfolio, as well as keeping up to date with its existing 34 holdings, was taking more time than I had available.
I didn’t want to shrink the amount of research I was doing per company, so the obvious solution was to reduce the number of holdings. But reduce it to what?
To answer that we’ll need to look at the following points:
Continue reading “How to build a concentrated portfolio of quality shares”
A few months ago I came up with a simple way to categorise companies and their shares based on their most important attributes.
For me, those most important attributes are Quality, Defensiveness and Value, so in this article I’ll outline how you can find out if a company is Quality, Defensive and/or good Value, and how you can combine these factors to categorise a wide variety of stocks.
Continue reading “How to categorise stocks as quality, defensive and/or value”
This article outlines how I look for quality companies capable of producing consistent and sustainable growth over long periods of time.
Continue reading “How to find quality companies producing consistent and sustainable growth”
This article looks at how I measure dividend growth along with other factors that support sustainable dividend growth.
Continue reading “How to measure dividend growth and the factors that support it”
This article covers some investing tips based on adjustments I’ve made to my defensive value investment strategy in response to the coronavirus pandemic.
So far this pandemic-driven downturn is nothing like a normal recession.
With high-quality companies suspending their dividends left, right and centre, the economic consequences of coronavirus are much more sector specific and much more devastating than we would normally see.
As a result, I’m sure that many investors have had to re-think their approach to buying and selling stocks as they attempt to minimise risks and maximise returns from their portfolios.
I’m no different. Over the last couple of months, I’ve made a few minor adjustments to my “defensive value” investment process which, I hope, will steer my portfolio through the storm and leave it well positioned on the other side.
These adjustments are based on sensible principles and I think they’ll apply to a wide range of investors.
Continue reading “Tips for investing in a coronavirus world”
The economic impact of the coronavirus pandemic should not be underestimated.
Continue reading “A dividend investor’s guide to recessions, depressions and pandemics”Investors who rely on dividends for a large part of their income should prepare for significant dividend cuts and suspensions in 2020.
In recent weeks, stock markets around the world have crashed as a direct result of the coronavirus pandemic.
In most corrections and market crashes, dividend investors are able to shrug off paper losses and focus on what really matters; their reliable stream of dividend payments.
But in the current crisis that may not be so easy.
The limitations on free movement of people and goods being put in place to slow the spread of the virus will have (and are already beginning to have) a significantly negative impact on the ability of most companies to generate the cash they need to pay dividends.
Already we’ve seen dividend suspensions from Marks & Spencer, Kingfisher (B&Q and Screwfix), Weatherspoons, ITV, Stagecoach and many more.
So how bad could it get? Of course we don’t know, but history may provide us with a few clues.
Continue reading “The potential impact of coronavirus on dividends”
I write the regular Dividend Hunter column for Master Investor magazine, and in the February issue I wrote about sustainable dividend growth and how to identify it.
In almost all cases, long-term dividend growth is unsustainable without earnings growth, earnings growth is unsustainable without revenue growth and revenue growth is unsustainable without capital employed growth.
In practice, this means companies can only produce long-term sustainable growth if they employ more capital to fund more factories, warehouses, vehicles, machines, robots, offices, computers and an endless array of other capital assets.
Or to put it another way, if you’re looking for sustainable dividend growth, you should start by looking for sustainable capital employed growth…
Continue reading “Hunting for sustainable dividend growth”A few weeks ago a reader asked me about the unit valuation system as he was thinking of using it to measure the performance of his investment portfolio.
I knew what the unit valuation system was, but it wasn’t something I used myself so I said I would write a blog post about it once I’d looked into it.
However, as I researched the unit valuation system it became clear that a different metric, the internal rate of return, was generally preferred as a measure of portfolio performance. So in the rest of this post, I want to describe what these performance metrics are, why the internal rate of return is better and why it might be a good idea to use both.
Free spreadsheet: If you’re familiar with these portfolio performance metrics then take a look at the free resources page. You’ll find a spreadsheet that can calculate returns using both the unit valuation system and the internal rate of return.
Continue reading “How to measure your portfolio’s returns (unit valuation system vs internal rate of return)”Unfortunately for his investors, Neil Woodford’s flagship fund is to be closed in the new year.
(Update: The entire Woodford empire is now closing down)
This is obviously terrible news as a lot of people could lose a lot of money.
I don’t want to trivialise this by jumping on the news-cycle bandwagon, although I guess that’s how this is going to look.
I saw a lot of “lessons from Woodford” articles across my news feed this morning, so I though I would apply the Tesco philosophy of “every little helps”, and re-publish an article I wrote a few weeks ago.
I wrote it for a new magazine called The Property Chronicle, published by those nice people at Harriman House (who also, not entirely uncoincidentally, publish my book).
Reading back through the article, I think two lessons are paramount (one of which I forgot to mention):
Unless you’re an accountant or an experienced and well-read investor, chances are you either haven’t heard of capitalising lease obligations or, if you have, it’s something you don’t do because it can be a lot of work.
Until recently I fell into the second group. I knew what lease capitalisation was (don’t worry if you don’t; I shall explain all shortly) but I didn’t do it because a) none of my investments had problems with crippling lease obligations and b) it was a lot of work.
However, the argument (or excuse) that it’s all too much work is about to become null and void, thanks to a new accounting standard known as IFRS 16: Leases.
This new standard is about to shine a great deal of sunlight onto what was previously a dark and largely hidden debt, so now seemed like a good time to review the basics of lease obligations and how much of what is generally a good thing can be too much.
After much pondering, frowning and chin-scratching I came to the (long overdue) conclusion that lease obligations are basically the same as debt obligations.
You can learn a bit about lease obligations and how I’m going to factor them into my investment process in this month’s Master Investor magazine (below).
I’ve also included Burberry, The Restaurant Group, Next (all of which I own) and Marks & Spencer (which I don’t own) as examples of how the hidden debt of lease obligations can seriously distort the accounts of retailers and other property-based businesses.
Continue reading “The hidden debt of lease obligations”
This value investing checklist is for long-term value investors looking for a decent combination of income and growth.
Continue reading “The ultimate value investing checklist”For most investors 2018 was a year to forget and from peak to trough, the FTSE All-Share index lost about 16% of its starting value.
For many this was too much to take and several subscribers informed me of their decision to exit the stock market.
That may have been the right decision for them, but since the end of 2018 the market has done what it usually does after corrections and bear markets; it’s rebounded strongly.
For example, the FTSE All-Share is up more than 10% in the first quarter of 2019 alone, and is now only five percent or so below its previous all-time high.
Continue reading “The 2018 stock market correction and the art of being patient”Most investors found 2018 to be a bumpy ride and I was no exception.
The market price of my portfolio declined by more than 10% during the year, which was mildly annoying. But that’s not really what I’m talking about.
When I talk about a bumpy ride, I mean bumpy in terms of the performance of the companies I’m invested in rather than the performance of their shares. And in that regard, 2018 was too bumpy for my liking.
I’m not saying 2018 was a complete disaster, because it wasn’t; but it was bad enough to make me take a step back and review my investments and my investment process from the ground up.
What I found was that several of my current holdings (and several of my past holdings) fell into one or more of three classes of value trap:
Having uncovered these value traps, I then came up with a handful of strategy tweaks designed to stop me falling into the same traps again.
I thought some of this would be useful for other investors, so I summarised the whole lot into an article for Master Investor magazine.
Continue reading “Learn from my mistakes and avoid these three value traps”In December I wrote an article for Master Investor magazine talking about ‘my stock market tip for 2019’.
At the time I was looking to switch my investment strategy from an earnings-based approach to one centred around free cash flows (i.e. operating cash flow minus capital expenses).
However, after some additional thought and meditation I have decided to back-track somewhat on my short-lived enthusiasm for free cash flows.
Continue reading “Should you look at free cash flows to find safer dividend payers?”This is the last in a short series of blog posts covering my stock screen and investment strategy updates for 2019 and beyond.
Here’s a list of the other posts in this series:
This post focuses on the lessons I’ve learned from investing in turnarounds and recovery stocks as well as corporate transformations.
Continue reading “Investing in turnarounds, recovery stocks and corporate transformations”This is the fourth in a short series of blog posts covering my stock screen and investment strategy updates for 2019 and beyond.
Here’s a list of all the posts in this series: