Every investor has developed their own way of picking and selecting individual stocks. I will share my own fundamentals and criteria of stock investing.
If you feel that some terms are not familiar and quite new I would suggest pick yourself a book of investing in the library or buy yourself a good one and I assure you that it will be a good investment.
At the bottom of this post I will leave books and references that might help you understand the basics of stock investment.
Invest for the long haul
I consider myself an investor rather than a trader. My investment outlook is long term therefore maximizing its return by compound interest. Long term which means 5 years and beyond.
My ultimate goal of investing in the stock market is to live off the growing dividends of my investment replacing my work (active) income without touching my capital.
Why I invest in Stock Market?
The average stock market return is 7% since inception and about 6-7% for the last 10 years.
I prefer investing in dividend growth stocks over other types of investment such as Real Estate Rental Property because of its liquidity. I can easily sell my investments during market hours if I need the cash. In addition, once funds are cleared within my brokerage (usually after 3 days) then I will be able to withdraw to my designated link account.
Finally, dividend investing is a passive source of income. Passive income is where your investments earning money with less or very minimal effort.
Some investment brokerage offer Dividend Reinvestment Plan (DRIP). Once you set up a DRIP to any of your chosen companies it will automatically buy more shares for you. Main advantage of a DRIP is that there are no commission and brokerage fees involved. In cases where DRIP is not offered just like with my online broker, I reinvest all dividends by manually buying more shares.
Basics of dividend stock investing
Stock market investing is buying a small share or shares of an individual company. In order to buy a share or shares of the company you need to have a stock broker. You can set up a brokerage at your own bank or simply choose an online brokerage.
Nowadays I find that there is great competition to get your business and online brokerage has cheaper commission and very easy to use. Once you have chosen your online brokerage then you are all set to buy and sell common stocks.
STOCK INVESTMENT FUNDAMENTALS
Again, I will not discuss in details some of these terms and suggest at your leisure to read books about investing.
Here are my fundamentals and criteria in choosing which companies I partnered with.
1) Low Price to Earnings ratio (P/E)
It is a valuation ratio that most investor look when selecting a company. I usually choose companies with P/E ratio of 15 and below. It is an important indicator that you are not paying a very expensive company. However, it is not an absolute measure as P/E is not reliable on other sectors such as technology.
2) Understanding Financial Statements.
These are written records of business activities and financial performance of the company.
Income statement = Focuses on revenues and expenses.
Balance Sheet = Assets, liabilities, and stockholders’ equity.
Cash Flow = It measures how well the company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.
3) Increasing Earning Per Share (EPS).
Once you are able to read and understand financial statements then the following next criteria are self-explanatory. I pick companies with increasing income for the last five years or longer.
4) Companies with minimal or no debt.
When a company handled debts very well, they have an excellent chance of growing and able to finance other investments that are very attractive to many investors. Ideally, I am looking at Debt/Equity ratio of < 0.5.
5) Securities with history of increasing dividends.
My long-term investment goal is to live off its dividend income without harvesting my capital. Therefore, I partnered companies with history of increasing its dividends for at least five years or longer.
As an investor, I have continually evolved myself. I used to pick companies with dividend yield of 4% and above during the great bull run before the COVID pandemic. However, not all performed well during this crisis as some of these companies either reduced or suspend dividends altogether. Therefore, I have re-balanced my portfolio and focused on companies (some dividend yields maybe lower) that have consistently increased dividends even during this economic crisis.
6) A Healthy Return on Equity (ROE).
ROE is net income divided by shareholders equity. It is expressed in percentage. It is a measure of how management effectively uses company’s assets to create profits. An ideal ROE is equal or better than its peer group. Ideally, I am partnering companies with ROE of 7% or greater. This is Warren Buffett favorite stock fundamental criteria.
7) Stable Payout Ratio.
Payout ratio is a proportion of earnings paid out as dividends to shareholders. It is expressed in percentage.
A low payout ratio means that much of its earnings is reinvested into growing its business while a payout ratio of over 100% shows that the company is paying out more dividends than its earnings.
Ideally, I would like to see payout ratios of 40-60% – but it’s not always the case. Some of my holdings are with payout ratios of over 100% but with very minimal debt and has consistently increased dividends in the last five years or more.
MY FINAL THOUGHTS
These are my core fundamentals and criteria in choosing a company to invest in. As a long-term investor these fundamentals has proven to have produced above average return in the overall market.
Above all, just like any type of investments exercise due diligence in any of your investment decisions. Therefore, if, any of the above fundamentals has drastically changed then I will consider selling and buy another company that fits my criteria.
What are your investment goals?
What are your own fundamentals as a long term investor?
Thanks for your sharing! Really valuable piece!
You’re welcome Jun. Appreciate your kind words.