The primary objective of the Dividend Growth Strategy is to create a portfolio that provides our investors with a growing stream of income.

Our strategy accomplishes two very important objectives: (1) it provides the investor with an increasing level of income each year that can be used to pay for retirement, college, travel or the normal inflation impacted prices of goods, and (2) when prices go down, the investor doesn’t have to sell shares in order to live. In general, our investor knows his or her dividend income is going up despite the near term market action. Of course, one of the consequences—and it is an important consequence—of following this strategy is that it generates attractive capital gains, as you can see by clicking Performance.

So how do we go about executing our strategy? The first step we take is to screen U.S. publicly traded companies for those that fit the following criteria: (1) they must yield a minimum of 1.5%, (2) their dividends have grown over a long period of time and (3) their dividends have been raised in at least 7 of the last 10 years. This step gives us our first cut.

The second step is to take the companies selected in step one and screen their financial statements through a set of criteria, focused on balance sheet strength, total capitalization, return on equity, sales growth, earnings growth rate and dividend payout ratios. Our purpose here is to investigate the financial strength--the dividend paying capability of the enterprise—and focus on potential problems that could affect that dividend paying ability. Surprisingly enough, just these two steps (which we perform on a continuous process) distill all of the U.S. publicly traded stocks down to only 150-200 companies. These 150-200 companies then serve as our investment universe. By the time we have completed this step, we have identified the premier investment grade companies in the United States. Then it is simply a matter of deciding when to buy and when to sell the shares of those companies.

The third step in the strategy is to set the buy/sell discipline for each of the stocks in our investment universe. This discipline dictates that we always have one buy price and two sell prices---one as a stop loss if the price declines and the other the price at which we take profits. Like our screening process, the buy/sell discipline is a continuous process. We begin by establishing a long term valuation channel for each company. Without getting into the math of this process, it incorporates a combination of technical and fundamental valuation factors and constantly adjusts them to account for the volatility of the common stock.

Our purpose is to insure that when we set a buy price it not only properly reflects the undervaluation of the company but also reflects the volatility of its stock. The higher the volatility, the bigger the discount we place on the buy price and the higher the premium we place on the sell price. A simple example would be two drug companies each earning a dollar of earnings. All other things being equal, if Company A’s stock is twice as volatile as Company B’s, then our buy price guideline for Company A will be one half of the buy price guideline for Company B. The reason is simple: virtually 100% of our purchases are made when the shares are at historically low valuation levels. So if Company A’s stock is twice as volatile as Company B’s, then it makes sense to us that, all other things being equal, the bottom in price for Company A is likely to be lower than that for Company B.

Details regarding our pricing disciplines may be found here, and the vulnerabilities we have identified can be viewed by clicking Risk Factors and Caveats.