How To Analyze Dividend Stocks In 14 Points by The Dividend Guy
- In an effort to simplify my investing process, I'm writing this article to highlight as little steps as possible to get a maximum result.
- The dividend discount model will tell you how much a company is worth when you consider its ability to pay dividends in the future.
- This is a good tool for income-seeking investors or if you want to compare to companies in the same sector.
- This idea was discussed in more depth with members of my private investing community, Dividend Growth Rocks.
The ultimate in sophistication is simplicity. I truly and genuinely believe that. I think we are often bored and we reinvent something with more steps and more complex characteristics to feel smart. Once you detail it over a 20-page document with graphs and annotations, you justify your concept's complexity.
But does it have to be that complicated? Can't you just simplify your investing process instead of adding metrics to analyze, steps to complete and ratios to calculate? When it's time to look at a company for the first time, each investor has their own methodology.
In an effort to simplify my investing process, I'm writing this article to highlight as little steps as possible to get a maximum result. Let's see if I can analyze a company with 20 points or less. You can use this article to create your own investing process, modifying some points to fit with your strategy. This list includes both qualitative and quantitative factors.
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#1 Business model
If you don't understand how the company makes money, you might as well forget about it. Understanding the business model will help you understanding in which situation the company will do well and when it could get hurt. You will be in a better position to get where the company is going and which strategies will be used to achieve their goals.
The very first thing I do when I look at a new company is to go on their website and read the "about us" description. This will tell me a little bit more about the business, but it is often not enough. Reading the "business description" from financial website such as YCharts or Reuters will usually clarify a few points. Then, I usually head toward the investor presentations section and read their quarterly earnings reports. Those two sources of information will give me additional information to understand fully how the company is making money.
Once I define their business model, I run a classic SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis.
The strengths of a company are defined by all tools and characteristics it can use to grow and serve their clients. The list of strength points could include the following:
- Market share
- Strong brand, brand recognitions
- Size and scale
- Perceived quality
- Business structure
- Management team
As opposed to strengths, weaknesses could drag the company down. You can also use the strengths list to identify the company's weakness. Keep all factors related to the company only as opportunities and threats that may up.
I define opportunities as growth vectors. Those are areas where the company can thrive and grow their business. It could be a new market, a new trend, a disruptive product, technology evolution, etc. By listing down opportunities, I basically answer the question, "How am I going to make money from this investment?" If there aren't enough opportunities, chances are the company won't make the cut to my portfolio.
What could go wrong? Is the company dependent on commodity prices? Is it evolving in a cyclical business where periods of revenue growth are followed by plateaus or decreasing investment cycles? As much as fun as it is to define strengths and opportunities, it's even more important to understand the company's weaknesses and potential threats.
Now that we have run through the "soft" part, it's time to look at cold hard numbers. Let's see how key metrics can tell you what you need to know about a company.
A word about metrics first
Before I share with you the list of metrics I use to analyze stocks, I'd like to highlight that metrics only tell you what already happened. Metrics are like raconteurs telling you about a great story. They can give you some guidance to predict the future, but it's not always accurate.
Also, it is very easy to add up metrics to your list and end your day with 50+ points to check. I make sure to keep about a dozen key metrics and ignore the rest. This is my trick to avoid "paralysis by analysis." I'm not saying those metrics are the only good ones, but they are my preferred indicators. This all starts with the first component of the dividend triangle: Revenue growth.
This article was written by The Dividend Guy. A well-known investment author on Seeking Alpha.
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