Here I will attempt to outline my method for selecting and selling stocks in my dividend growth portfolio. I say attempt because this is a work in progress and most likely will be until I get some more experience under my belt. Whenever I have enough money to go shopping I typically go through the following steps:

UPDATE: Most of the steps below have been automated – please see my post titled “Dividend Growth Stock Ranking System” for details.


Step 1: Pool of stocks

My go-to basket of stocks is the CCC list that is maintained by David Fish (complete version). There is also a summarized version that can be viewed at DailyDividendAlert. This is a list of all dividend growth stocks that are dividend champions, contenders and challengers. While this is a great starting point I do not limit myself to stocks on this list. If I find another stock that looks promising I will research it appropriately (ex – AAPL). I find these through articles on Seeking Alpha and other news sites and also through my own screens.

Step 2: FinancialĀ strength

Next I look at financial metrics like earnings growth, free cash flow, debt, margins, etc. I prefer to see at least 5 years of increasing earnings, enough free cash flow to easily cover the dividend, little to no debt and growing margins.

Step 3: Dividend strength

I almost exclusively buy stocks with greater than 2% yields but I don’t want to miss out on any companies increasing their dividends like gangbusters. If a company yields less than 2% currently but has a ton of cash and incredible earnings growth I will certainly consider it (AAPL!!). I also look for a healthy payout ratio of less than 70%, but of course this depends on the sector (ex – T).

Step 4: Valuation

I use three methods to determine if a stock is worth buying at it’s current price. One is the Gordon Growth Model which is defined by Investopedia HERE. I typically use 10% for my required rate of return and plug n chug. Keep in mind that this model only works well for large companies with well established dividend growth. I also occasionally use a discounted cash flow model which is defined by Investopedia HERE. Finally, I look at the 12 month target price provided by Merrill Edge and / or the consensus analyst target. I know it is not ideal to put a lot of trust into other people’s opinions but I really use this as a confirmation of my own valuations. Several people arriving at the same number is better than just one person.

Step 5: Technical analysis

I like to buy stocks that have strong support. This is not crucial but it helps me sleep at night.

Step 6: Subjective analysis

At this point I have most likely whittled my pool of stocks down to a handful. Now I look at my asset allocation and ask myself – which of these stocks will help me better diversify my portfolio? Which of these stocks do I LIKE? Do I use their product? Etc…

After following these 6 steps, the choice is usually obvious. It only takes a couple of hours to perform this exercise and I like to do it quarterly. That way I always have a handful of stocks that I’m really interested in whenever some money becomes available.

My criteria for selling a stock is much simpler: If a company cuts their dividendĀ or I no longer like the company’s direction I will sell.


2 Responses

  1. Grant Willey says:

    Outstanding methodology for evaluating stocks. Goes for both buys and sells. Some say that selling is very hard for them to do, but if you set rules and a stocks performance or management violates your plan, punching the eject button should be easy – not one that should torture you and leave you second guessing. Your methods take a lot of the uncertainty out of the equation. Kudos!

    • Dividend Empire Dividend Empire says:

      Thanks Grant. The method is constantly evolving but this general skeleton doesn’t change. Regarding selling stock, I haven’t really been put to the test yet with a dividend cut. I’m sure it will happen and hopefully I have the discipline to stick to my plan.

      Take care,


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