A reader of my blog long-term-investments.blogspot.com, Barnard, wrote me on Facebook a question. Here are his words:
“Tom your advice on dividend buying and reinvestment has been informative. I will make a donation to the cause. I hope you can elaborate on how to turn dividend growth stocks into growth that can double ones assets the quickest. Would such a feat be possible even in 1/2 a decade?”
Well that’s a really good question and I give you the answer short. Yes you can double your investment in a half decade. I did it over the recent two years. But its work and luck combiend. You also need to sell some positions with a higher valuation and put the fresh money into new alternatives with bigger growth potential. The basis assumption is that you have really good running capital markets which give you tail wind. As example: The whole market doubled since the market lows in March 2009. It’s easy to make money in markets that go up in a short time.
It’s hard to predict growth. Analysts do this but they revise their predictions with every new quarter report. I personally look at the long-term growth from the past. If I see a stock with a 10 year dividend growth of 10% and the 1 year, 3 year and 5 year growth is in the same range, it should be possible that the company raise dividends at the same rate in the near future. A few points make is easier to predict the possibility for a stable, growing or even slowing rate:
- Payout ratios
A company with low payout ratios has a bigger possibility to grow dividends on a higher rate.
- Expected Earnings Growth
A strong growth could be a good sign that the company raises dividends by the same amount of the earnings growth or even better if the cash flow is strong and the current payout ratios are too low.
- Debt ratios
Low debt amounts or even big mountains of cash are good indicators for growing dividends.
Back to your question. If you like to double your investments in five years, you need to find stocks with a yearly grow rate (dividends included) of 14% or more.
I will not give you tips of stocks to buy or sell because I have no idea where the stock market is in 5 years. The truth is that I can’t tell you because I don’t know it and everybody else don't know it too.
I buy stocks because of the good looking fundamentals. In addition, I try to eliminate the risks from stocks with diversification. I avoid an overweighting of a single stock – Not more than 1% of my net worth should be invested in a non-core stock. This rule gives me the possibility to realize a higher return by investing more money into faster growing stocks.