Imagine that you won $50MM from the lottery last night. What would you do with your winnings? Wouldn’t it be nice to own companies that generate consistent profits and that distribute dividends regularly to their shareholders? Suppose you took the $50MM in winnings and bought shares in dividend paying companies like McDonalds, Chevron, Microsoft, Johnson & Johnson and JPM Chase? Assuming that your dividend stock portfolio yields around 3%, your annual income from your $50MM portfolio would be a cool $1.5MM from dividend payments plus the capital appreciation of the stocks. You should be able to live off the $1.5MM of dividends while the stocks appreciate and your dividends would likely keep up with inflation as the business profits continue to grow. Personally, I would definitely create a dividend portfolio to generate income from the lottery winnings.
Investing for dividends is one of the core tools that every eclectic investor should have in his toolkit. Here is a quick checklist I use to screen dividend stock candidates:
1) Do I understand how the businesses make money?
2) Does it fit in your industry allocation mix?
3) Is the dividend yield greater than the 10 year T-Note?
4) Is the dividend safe? Meaning that the business generates enough cash flow to consistently pay dividends throughout the business cycle.
5) Is the dividend growing?
6) Is the business growing?
7) Is the stock trading at a fair value or is it undervalued?
8) Is the candidate stock a member of the dividend aristocrats or dividend achievers list? (I’ll go into more details in a future post).
If your dividend stock candidate gets a “yes” in all eight questions, then, it is a candidate for your dividend portfolio. Question number 8 is optional. Being a dividend aristocrat or achiever is a very hard feat to accomplish. Not being on these lists doesn’t mean it can’t be in your dividend portfolio. It means that you should verify that it has a history of paying dividends that you are comfortable with. For example, Apple just started paying regular dividends last year and it is too new of a dividend payer to be on the Aristocrat (25 years of consistent dividend payments) or the Achiever (10 years of consistent dividend payments) list. However, do I believe that Apple has the ability to make their dividend payments over the next 5 years? Yes, I do. Hence, it can form part of my candidate list.
The quick screen that we just reviewed should help you identify very good candidates for your dividend portfolio. In future posts, I can go thru each question in detail and show where and how to find the information you need to answer the questions. Please let me know by posting to the comment section if this would be of interest.
Have a great day! Invest eclectically!