Olivier Le Moal
In this series of articles, we focus on selecting and highlighting stocks that have rapidly grown their dividends in the recent past. We also need to ensure that these stocks will likely grow their earnings at a fast pace in the next few years. Due to their hypergrowth, their price generally grows quickly, and they usually do not pay very high current yields. With high-growth stocks, we need to be content with a lower current yield. However, please keep in mind that nothing is permanent, and with time, their business model matures, or new competition/technology can emerge and change their growth patterns. That’s why it may be important that we monitor these stocks at least every quarter.
If you need higher yields, please read the most recent article from our monthly series titled “5 Relatively Secure and Cheap DGI,” which focuses on moderate to high current income – favoring high-yield names. Irrespective of whether your goal is high dividend growth or high current income, we always need to pay attention to the quality of companies that we invest in and the price we pay.
Note: Please note that the stocks shortlisted and highlighted in this article are not buy recommendations per se but rather candidates for further research. Before making any investments, please use your due diligence, considering your personal goals and risk tolerance. Also, some sections in the article (Introduction, Selection methodology/process, etc.) will be repetitive from month to month for the benefit of the new readers. Such sections would be displayed in “italics,” and regular readers could skip them.
Why High Growth Dividend Stocks?
There are two types of dividend stocks that a DGI investor can choose from depending upon their individual situation, goals, and investing time horizon:
High Growth Low Yield [HGLY]
Low Growth High Yield [LGHY].
As the names suggest, the HGLY category would have stocks that offer a high rate of dividend growth but usually a low current yield. These stocks would normally have low payment ratios, manageable levels of debt, and rapidly rising earnings.
On the other hand, LGHY-type stocks would offer a high current yield (generally 3% and higher) but a lower rate of dividend growth. Generally speaking, these companies are more mature and stable businesses that have their hyper-growth period in the rearview but still grow modestly over time to support a low but stable growth in dividends.
Obviously, there will be stocks that fit somewhere in between these two categories, for example, medium growth and medium current yield.
So, who should own HGLY-type stocks? Basically, anyone who is in the accumulation phase and does not need the income currently and/or in the next five to ten years should own some high-growth dividend stocks. In addition, folks (including retirees) with large investment capital that generates more income than they need (for example, 1.5x or 2x their income needs) should invest in HGLY-type stocks, at least partially.
How To Structure A Portfolio Based On This Series
Though it would depend a great deal on your personal goals, risk tolerance, investment methodology, and choices if you wish to make a portfolio based on this monthly series, here is one way to do it
- Make a portfolio budget and provision to have a maximum of 20 to 25 stocks over time.
- Divide your capital (current + future) into 20 equal parts.
- In the first month, buy 5 to 7 positions based on the 10 top stocks for that month.
- From the next month onwards, check for the new stocks appearing in the top 10 list that are not part of your portfolio, and add (as many as your process and budget allow).
- Repeat step 4 until you reach 20 (or max) positions.
When you have reached the maximum 20 or 25 positions and have no more capital to add, look for new stocks based on your own research. You could also look at our monthly top 10 list and see if any of them should be added. If you decide to add a position, you need to find a position you would like to drop and replace it with a new one.
It may also be recommended to monitor your positions periodically, preferably monthly, but at least quarterly. Also, make sure that you do not overweight any particular sector or industry segment.
Selection Criteria
We will draw upon our original current month’s data set, taken from our other DGI series (5 Relatively Safe and Cheap DGI), and update it with the current data. We will then apply additional criteria to filter out stocks that have provided a high rate of dividend growth in the recent past and are likely to continue on that path for the foreseeable future.
Please see our original article to get a complete spreadsheet of this dataset. For the sake of clarity, we will list the original filtering criteria below:
- Market cap …