Step 1 of 8 Steps: Request for further elaboration

Q&A › Category: Dividend Stocks › Step 1 of 8 Steps: Request for further elaboration
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ANDY LIEW asked 1 year ago
Hi, If i can try to summarize Step 1 in a single sentence: "Step 1 is to pre-qualify good Dividend Stock (excluding Growth Stock), as one that gave dividends say 80% or more of the time in the last 5-10 years, with a decent Dividend Yield of more than 2.5% (more than CPF OA as a benchmark)." a) Please comment on the statement above? b) I assume it is very subjective on what is Minimum Acceptance Level of Consistency and Dividend Yield, as it depends on alternative investment of a person? So we use this criteria more like ranking or comparing different Dividend Stocks, rather than Pass/Fail based on Absolute Numbers? c) Basically if i want to create an Algorithm to Screen for good Dividend Stocks, what are the suggested criteria and corresponding definitive numbers, rather than human's discretion? Thanks.
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Rusmin Ang Staff answered 1 year ago

Hi Andy

Step 1 is basically to filter out companies that pay dividends. If they don't, then they will be out. We just have to focus on the list of stocks that pay dividends but these dividend stocks can have various yield range. A 2.5% is quick start for everyone because if the yield is too low, then it makes sense to put it in the risk-free asset which I use CPF OA yield. Again, this is debatable since stock with low yield can have higher capital gain upside, i.e. US dividend stocks tend to have low yield due to lower payout ratio. From our survey, investors who joined dividend machines usually want to have higher yield, i.e. 4% - 6%. So they can filter out stocks that have the yield that meet their expectation since they would want to receive the regular cashflow by investing in these dividend stocks, without waiting for the share price to go up to see the return. You will still need to run through the rest of the steps.

Step 1 is just the start of the process. It is certainly not fair to eliminate those quality stocks that don't pay dividend. Again, we have to go back to the initial objective - dividend investors want to invest for income, less on capital gain. With proper timing of entry price (Step 8), we can still get decent capital gain on top of the regular dividends.

ANDY LIEW replied 1 year ago

Hi Rusmin, thank you for the quick respond. Assuming we dont consider Growth Stock for this segment and only look for good Dividend Stock that gives “good” dividends, “consistently” and its stock price does not deviate too much from the market. So for Step 1 – the stock must give dividends every year? If not, how many % of the last few years? Reasonable number of years to llok back? Minimum 5 years or stretch before slightly before or after a Black Swan event? Thanks.

Rusmin Ang Staff replied 1 year ago

Step one, just filter based on one year dividend. Most stock filter only filter the latest one year. Step two, we look at their historical data, up to five to ten years. We do stretch to fifth-teen to twenty years if there is enough date. For Step 2, if dividend stock can pay during downturn, i.e. 2020 Covid or 2008/09 crash, then likely they are quite resilient. Again, we tie everything back to their business for the rest of the step.

ANDY LIEW replied 1 year ago

Understood. Thanks.