Live Bootcamp: Dividend Growth Investing!
A business with a moderate dividend yield is prima-facie evidence of 3 key traits- +The ability of the business to generate free cash
+The intent of the promoter to return it
+Valuation comfort on free cash yield
When done right, dividend growth investing can help you with income, downside protection & growth - yet it is relatively underappreciated in investing circles - so we thought we’d write a short piece explaining how it works!
There are two key traits that we look for when selecting an ideal dividend growth opportunity - Stability & Inflation protected growth! Let’s dive into each of these separately!
1. Steady (You want the core business as well as the ability of the business to pay out cash to be relatively steady)
a. Stability & Cyclicity of core business
b. Ability of the business to generate free cash
c. Intent of management to pay out free cash
You screen for A by selecting defensive sectors - Consumer, IT, Utilities and the like. These grow at a broadly steady rate and more importantly are generally able to maintain a fair degree of margin stability as well!
You screen for B by ROE consistency - ideally 13-15%+ returns generated on a consistent basis is what you’re looking for.
You screen for C by a track record of consistent dividends that are paid out of free cash that the business is generating, and a reasonable payout ratio. A very key thing to check for here is whether the dividends are coming out of internal accruals or external financing or one offs.
2. Inflation protected (You want the income source to grow faster than inflation, and hopefully allow for some lifestyle creep)
Here there is always a tradeoff between growth, the reinvestment the business needs and the yields you’re able to fetch, and you’ll have to make your calls depending on your risk appetite. If you’re lucky (and incredibly patient) you might just be able to fetch yourself a 5% yield 13% growth business!
We are conducting a live Bootcamp this Sunday to deep-dive through the Process + Pitfalls of building a quality Dividend growth portfolio with live examples!
Link to join:https://bit.ly/3Z3j6rD
Date: 8th Jan 2023, 10AM onwards
Medium: Online (Skype)