Sunday, August 1, 2010

7 Dividend-Growth Stocks Checklist

These are the 7 criteria that I have always been using to decide whether a stock is a good buy or not.

1. The company has a competitive advantage over its competitors
a. The company is the leader in the industry
b. The company has a brand monopoly
c. The company's market capitalization > 25B
d. The Net Profit Margin is higher than the industry's average

2. The stock pays sustainable growing dividends
a. Dividend yield > 2.5% or average dividend growth > 10%
b. The stock has always been consistently increasing its dividends every year in the past 10 years
c. Dividend payout ratio < 65% in the past 10 years

3. The business is extremely profitable
a. ROE > 12% and ROA > 7% (ROA doesn't apply for bank stocks)
b. 10-year revenue growth rate > 7%
c. 10-year net income/EPS growth rate > 7%
d. Net margin % > 20%

4. The company's management team has a clear strategy for future growth drivers

5. The company is financially healthy
a. Current ratio > 1
b. Debt/equity < 1 (doesn't apply for bank stocks)

6. The company has low capital expenditures (Free Cash Flow > 5% Sales Revenue)

7. The stock is currently undervalued
a. FP/E < 15
b. The stock has dropped at least 20% from the 52-week high (if this is caused by a bad news, it shouldn't affect the company's long-term profitability)
c. The stock should at least be trading at least 10% lower from Standard & Poor's 1-year price target
d. The stock should at least be trading at 'fair value' according the Standard & Poor's