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Guide to Dividend Growth Investing

How to Choose the Right Dividend Stocks

With thousands of public companies paying their shareholders a regular dividend, how can you determine which are the most likely to be considered great picks 10, 20 or 30 years from now. I use a four-dimensional analysis to help me separate the winners from the losers: 

•    Does the company have a track of paying and increasing dividends over time?
•    Will the company be able to sustain and increase its dividend moving forward?
•    Does the company have a sound business model? 
•    Is the company stock price reasonably valued? 

All of the information I use to conduct this analysis and that is referred to below is public. There are numerous websites you can use to find this information, Yahoo Finance, Google Finance, and my favorite Morningstar are just a few examples. Search for the company and you will find what you need to conduct your own stock analysis.  

Track record of paying and increasing dividend

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Dividend Track Record

The best dividend stocks have a solid track record of both paying and increasing  their dividend without interruption. Management can talk a good game about paying dividends, but the proof is in the pudding. Companies that not only pay dividends in difficult economic times, but also increase their dividends are obviously committed to dividends and manage the company effectively to put it in position to double down when others are cutting their dividend.

To filter out the dividend posers from the stars I insist my dividend investments clear the following bar: 

5+ years of paying a dividend

5+ years of annual dividend increases

5+ years of paying a dividend

5+ years of annual dividend increases

You can raise the number of years if you are a little more risk averse, but it comes at the expense of finding emerging dividend stars. 
To help me find dividend stars I also apply a simple formula I call the Total Dividend Score as a filter that ensures a good balance between yield and growth: 

Total Dividend Score: Dividend yield plus annual dividend growth rate is equal to or greater than 10%

Total Dividend Score: Dividend yield plus annual dividend growth rate is equal to or greater than 10%

I find setting a threshold for the dividend yield and dividend growth to be 10% or higher gives me the flexibility I need to construct the ideal portfolio that gives me money today (yield) and security against inflation (growth).


This total dividend score formula has me investing in companies that are quite different from one another and have distinct dividend profiles. For example, I hold both Telus (TSE:T) and APPLE (NASDAQ:APPL) in my dividend portfolio. Despite both companies playing key roles in serving up mobile experiences for their shared customers, these are two stocks that are quite different. But each serves their purpose in my portfolio. 

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Despite screening for companies with a total dividend score above 10%, I insist on all my dividend investments having a yield of at least 1.5% and a minimum annual dividend growth rate exceeding 3%

Ability to sustain and grow dividend

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Ability to Sustain & Grow Dividend

Looking at the history of a company’s dividend record is like looking in a rear-view mirror, it tells you what’s behind but not what lies ahead. For this we need to dig into the company’s ability to continue to pay and grow its dividend. We invested in the company for its dividend, so we don’t want them to take it away. We also want to see the dividend grow over time, so it stays ahead of inflation. 


One of the key measures used to assess a company’s ability to not only continue paying a dividend but raising it is a metric called the dividend payout ratio. 

Dividend payout ratio = Dividends paid/Net income

Dividend payout ratio must be below 60%

Another helpful indicator of a company’s ability to grow its dividend is whether it is growing its Earnings Per Share (EPS). 

My confidence that a company will continue to increase its dividends is solidified when I see the company growing its EPS greater than 5% on an annualized basis, over the last five-years.

Strong business model

Image by Patrick Tomasso
Strong Business Model

It’s important to go beyond the numbers to truly understand if a company can grow its distributable cash in different economic cycles and competitive environments. 


  • Does the company have a sustainable competitive advantage?

  • Are their major competitive, regulatory, or industry dynamics that could pose a threat to the company growing?

  • Is the company able to innovate? Are they investing in projects that move the company forward?

  • Does the company have new markets to enter and grow?

  • Are the company’s fundamentals deteriorating (e.g., decreasing revenue, profits, or cash flow) or sound? 


What you are analyzing in assessing the company’s business model is its ability to generate revenue and grow the organization on a sustained basis. While it is difficult to find quantitative measures to help with your business model analysis, there is one metric I use to filter out poor quality businesses that won’t be able to grow their dividend in the long run – it’s called Return on Equity (ROE). 

Return on Equity (ROE) = Net Income/Shareholder Equity

ROE measures the profitability of a company in relation to its shareholders’ equity. I use ROE as a proxy for assessing the company’s (i.e., management) effectiveness at investing in projects to generate earning growth. This will give us an idea if the company is good at allocating capital to grow its earning (and thus dividends) well into the future. 

The higher the ROE, the more effective management is at reinvesting their shareholders capital to generating income and growth, and thus the more the likely to be able to produce this high performance in the future. 

ROE should be inline or above their industry peers. As a shortcut, you can consider a return on equity of greater than 12% 

Reasonably valued

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Reasonably Valued

One of my favorite quotes from the world’s most famous investor is particularly apt when it comes to dividend investing. 

"Price is What You Pay; Value is What You Get" 
-    Warren Buffett

Outside of a recession or a dividend cut, you will not find your favorite dividend paying companies in the bargain bins of the world’s stock exchanges. Consistent dividend growers are usually exceptionally well-run companies, don’t expect to find them majorly undervalued. 

With 63+ years of increasing their dividend annually I am a big fan of Proctor & Gamble (PG), but I have yet to find a share price that I am comfortable entering in at. Since I’ve been monitoring Proctor & Gamble its valuation has been too rich for me. Conversely, I waited on Johnson & Johnson (JNJ), Coca-Cola (KO), 3M (MMM), and Sherwin Williams (SHW) to each take momentary stock price dips to get in at a reasonable valuation. 


Good fundamentals, such as current valuations, matter when evaluating any public company – dividend payer or not. It’s not just about a good dividend growth streak, as history shows us good streaks can end. In 2009 and 2010 a total of 19 companies were taken off the dividend aristocrats index due to dividend cuts brought on by the 2008 financial crisis. 


The simple ratio I use to assess the current valuation of an equity I’m considering adding to my dividend portfolio is the Price-to-Earnings (P/E) ratio. The P/E ratio shows what investors are willing to pay per dollar of earnings. 


P/E Ratio = Market value per share/Earnings per share

To ensure a fair valuation the P/E ratio of a company I’m considering investing in for dividends must be below 20

The PE ratio is a simple ratio to get a quick, back of the napkin read on whether a company is fairly priced. For dividend investments it suits my purposes. If I’m looking to make a value investment, I will get more detailed in my valuation analysis. You can read more about this analysis in my post about selecting winning stocks.   

Dividend stock selection checklist

Dividend stock selection checklist
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