How to Consistently Find Dividend Growth Stocks You Can Hold Forever

One of the biggest mistakes investors make when investing in dividend stocks is paying too close attention to yield. If you fall for that trap, it's going to cost you a lot of money. I left a successful career on Wall Street decades early because I figured out how to make dividend stocks work for me. That's what I'm going to show you today in simple terms. How to evaluate any dividend stock in under 12 minutes. Let's start with the most important factor of all, track record. I worked as a hiring manager for over a decade. And a key indicator of future success was past success. Someone stops showing up for work, they're useless because I can't count on them. If a company stops paying a dividend, that's no longer income I can count on. And when I'm retired, I want to sleep well at night knowing that my income is secure. The first thing I look at for a dividend stock is how many years a company has been increasing their dividend. Notice, not just paying a dividend, increasing their dividend. Entrance to the club starts at 25 years. That means they've been increasing dividends before Caitlyn Clark was even born. The average company in my 30 stock dividend growth investing portfolio, they've been increasing their dividends for 48 years in a row on average. That's longer than Roger Federer has been alive. Once companies achieve such a track record, they'll usually do whatever it takes to preserve it. And I like that because every year I can count on my income going up, my quality of life going up as well. And that brings us to number two, which is size. You may have heard people talking about economies of scale. That refers to larger companies having an advantage simply because they're large. If you have fixed costs, the larger you become, the more your margins expand. That's called operating leverage. Comes with size. Speaking of leverage, think about how much leverage Walmart has with their suppliers. A lot. As a large company, they have better access to financing and capital, better interest rates. People trust them. Nobody ever got fired for buying IBM, as they often say. Large companies can attract better talent. They can spend more R&D dollars on creating better products and innovating. They have the capital needed to absorb upandcoming smaller competitive threats. and they have loads of proprietary big data that can now be fed to AI algorithms so they can create more efficiencies. Large companies are often leaders in their domain and we like to invest in leaders. They're more difficult to displace. We reward a company for being large and the average company in our portfolio is about $190 billion. That's about the size of McDonald's, which is a good segue into our next factor, international exposure. Now, when you're retired or living in early retirement or just living off your income, the worst thing that can happen is that income goes away. A big company is less likely to run into problems if they have customers located around the world, not just in one country. The US is the biggest country in the world, of course, 26% of global GDP, but just 4% of the world's population. We try to avoid companies that have 100% of their success tied to a single country, which is usually the United States of America. When you're selling your products or services in other countries, then your costs and revenues are often in other currencies. This helps insulate your company from country and currency risk that's inherent to the United States. Provides internal diversification. Sure, the US dollar has been historically strong, but is that going to be the case forever? Approximately 28% of aggregate S&P 500 revenue, that's the 500 largest companies in the United States, is generated from overseas, whilst the remainder comes from the United States. In our portfolio, that number is much higher. It's about 38%. We view companies with international operations much more favorably because that geographical diversification they have provides stability. Stability provides consistency in earnings, which translates into dividend growth consistency, predictability. Speaking of dividend growth, that's what investors should pay attention to, not yield. So, let's talk about yield first. People focus too much on yield. So, let's define it first so we're all singing from the same hymbook. Let's take McDonald's as an example. So, the company is trading at $267 a share. We can take the last four quarters. We can sum those together and divide that by 267. and we get 2.82% yield. Now, the current yield for the S&P 500, that's about 1%. That's below its typical average, but you can see here that yield changes over time based on the price of the stock and of course dividend payments. You can see McDonald's yield has been slowly declining over time, though it's bumped up. Now, be careful here because a high yield is not always good in the same way that a low yield is not desirable. If you're looking for income, that is. And that's what most dividend growth investors are looking for. So we generally avoid stocks with a yield below 1.5% and stop viewing high yields as a positive somewhere around 5 to 6%. Now a yield of 1% that takes a long time to grow into something meaningful. On the other hand, yields get abnormally high usually because they likely won't increase by much or are not increasing at all. A general rule would be that a yield of 6% or higher is a concern. And as for smaller yields, even a 1.5% yield can grow quite quickly at a double-digit growth rate. So let's talk about dividend growth. That brings us to the next factor, which actually has two parts that we look at 5-year dividend growth and 10-year dividend growth. We give more waiting to 10year, but we also look at five-year growth as a leading indicator. So here's an example using McDonald's again showing their last increase was an increase of 5%. Well then what you can do is say what was the average increase over the last 5 years and 10 years. Well here it is right. So around 7.3% for 5 years 7.6% for 10 years. You see a little bit of deceleration there. Right now when you look at let's say $1,000 of income increasing by 7.5% every year over a sustained time frame. You can see here that by year 40 that $1,000 has turned into $18,000. It's the power of compounding. So a 7.5% growth rate, which is about the average in our own portfolio, handily outpaces inflation and increases your quality of life as time goes on. Now, the amount of money being generated off your initial investment, that's called yield on cost. So McDonald's has increased their dividend now for 49 years in a row. They're almost a dividend king. That would be 50 years in a row of increases. 49 years in a row. That's longer than famed US venture capitalist Ashton Kutcher has been alive. Dude, where's my alpha? Let me tell you an incredible story about McDonald's. In 1976, McDonald's was still an aggressive, high- growth stock. They were expanding rapidly across North America and the globe. Now, growth companies in that era typically retained nearly 100% of their earnings to reinvest, of course, in their growing business, as growth companies do, but they usually offered a token dividend payout primarily to attract institutional funds that were legally required to hold dividend paying stocks at the time. And McDonald's only offered this minuscule 0.2% yield. Right now, they then initiated their growth streak in 1977. and they raised that payout by 126%. So $10,000 worth of McDonald's at that time, the first year they started paying that dividend would have been $20 a year. Right today, that $10,000 would be generating well over $120,000 annually in dividend cash alone on that $10,000 investment. That's crazy. So every year you're getting like 12 times your original investment in a dividend check. That's the power of compounding. That's a yield on cost of about 1,200%. And you haven't even touched the principal. That's because they've increased their dividend on average, this is remarkable, by 18.5% every year for 49 years in a row. Remarkable business. And when you start to reinvest those dividends, you have 950 times your original money. If you just took the dividends, you'd have 433 times your original money. It's pretty good return on investment. Now, I'm aware that McDonald's probably isn't going to replicate this incredible performance going forward, but it's still a very remarkable business and there's plenty of upside for them in emerging and frontier markets. That's a different conversation in itself. Now, for those of you looking for strong dividend growth today, I'll give you a few more examples. Take these two Canadian oil companies that have been enjoying all that drama in the Straight of Hormuz. both have 10-year growth rates around 19% and five-year growth rates that are showing acceleration off that base. So, if the 10year growth persists for Imperial Oil for 10 years, your yield on cost is going to be around 11%. For CNR, that yield on cost is going to be around 21.5%. And the payout ratios for these companies gives them plenty of leeway. And that's a good segue into talking about our sixth factor, which is payout ratio. It's important to understand where all these dividend payments come from. It all starts with a company selling shares to raise capital. They then take that capital and use it to generate a return on the original money invested. That return manifests itself in the form of profits or earnings. What can they do with those earnings? Well, a growth company, as I said, will typically reinvest those earnings back into the business, while a value company will often distribute a percentage of their earnings to investors in the form of a dividend. If a company has $10 million in profits and distributes five million in dividends, the payout ratio is 50%. A high payout ratio therefore indicates that perhaps that dividend might stop growing in the future. That's why we pay close attention to that metric. Low payout ratio indicates lots of room for increases in the future. So let's review the six factors we discussed today that will help you find the best dividend stocks in the world. Number of years increasing dividend. The more the better. At least 25. Size bigger is always better. International exposure, this helps create diversification. Yield, a bigger yield is not always better. And dividend growth, that's what fuels the compounding effect. Finally, payout ratio, which gives companies buffers to keep those track records increasing over time. Now, scoring a company well is only half the job. How you actually buy it and when you let it go matters just as much. This is the exact system we built our Quantigen strategy on. And this next great piece shows you how to build the perfect dividend growth stock portfolio. Give that a watch next. Thanks so much for taking the time to watch this today.