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The 8 Rules of Dividend Investing

Dividend investing is about owning businesses that will pay you.

The best dividend stocks pay rising dividends year after year.  These are typically well known businesses with long dividend histories.

The 8 Rules of Dividend Investing quantify the best dividend growth stocks for long-term investors so you know exactly what stocks to buy and sell.

Free Bonus Section: See The Top 10 Dividend Aristocrats as ranked by The 8 Rules of Dividend Investing. Click here to download a free PDF of the Top 10 Dividend Aristocrats to add to your portfolio.

All of The 8 Rules are supported by academic research and ‘common sense’ principles from many of the world’s greatest investors.

Each rule is listed out below:

Free Bonus Section: Click here to download The 8 Rules of Dividend Investing as a PDF document so you can refer to it again.

Rules 1 to 5:  What to Buy


Rule # 1 – The Quality Rule

“The single greatest edge an investor can have is a long term orientation”

Seth Klarman

Common Sense Idea:  Invest in high quality businesses that have a proven long-term record of stability, growth, and profitability.  There is no reason to own a mediocre business when you can own a high quality business.

Financial Rule:  Invest only in stocks with 25 or more years of dividend payments without a reduction.

Evidence:  The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

Source:  S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2


Rule # 2 – The Bargain Rule

“Price is what you pay, value is what you get”

Warren Buffett

Common Sense Idea:  Invest in businesses that pay you the most dividends so you can increase dividend income stream

Financial Rule:  Rank stocks by dividend yield.

Evidence:  The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through 2013.

Source:  Dividends:  A Review of Historical Returns by Heartland Funds, page 2

Rule 2 Picture


Rule # 3 – The Safety Rule

“The secret of sound investment in 3 words; margin of safety”

– Benjamin Graham

Common Sense Idea:  If a business is paying out all its income as dividends, it has no margin of safety.  When a business downturn occurs, the dividend must be reduced.  Invest in businesses that have higher income than dividends to help ensure dividends won’t be cut during business downturns.

Financial Rule:  Rank stocks by their payout ratios.

Evidence:  High yield low payout ratio stocks outperformed high yield high payout ratio stocks by 8.2% per year from 1990 to 2006.

Source:  High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Rule 3 Picture


Rule # 4 – The Growth Rule

“All you need for a lifetime of successful investing is a few big winners”

– Peter Lynch

Common Sense Idea:  Invest in businesses that have a history of solid growth.  If a business has maintained a high growth rate for several years, they are likely to continue to do so.  The more a business grows, the more profitable your investment will become.

Financial Rule:  Rank stocks by the lower of long-term earnings-per-share growth or dividend growth.

Evidence:  Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4% per year from 1972 to 2013.

Source:  Rising Dividends Fund, Oppenheimer, page 4

Rule 4 Picture


Rule # 5 – The Peace of Mind Rule

“Psychology is probably the most important factor in the market – and one that is least understood”

– David Dreman

Common Sense Idea:  Look for businesses that people invest in during recessions and times of panic.  These businesses will have a relatively stable stock price that will make them easier to hold for the long run.

Financial Rule:  Rank stocks by their long-term volatility and beta

Evidence:  The S&P Low Volatility index outperformed the S&P500 by 2.00% per year for the 20 year period ending September 30th, 2011.

Source:  S&P 500 Low Volatility Index: Low & Slow Could Win the Race, page 3

Rule 5 Picture


Rules 6 & 7:  When to Sell


Rule # 6 – The Overpriced Rule

“Pigs get fat, hogs get slaughtered”

– Unknown

Common Sense Idea:  If you are offered $500,000 for a $250,000 house, you take the money.  It is the same with a stock.  If you can sell a stock for much more than it is worth , you should.  Take the money and reinvest it into businesses that pay higher dividends.

Financial Rule:  Sell when the normalized P/E ratio is over 40.

Evidence:  The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Source:  The Case for Value by Brandes Investment Partners, Page 2

Rule 6 Picture


Rule # 7 – The Survival of the Fittest Rule

“When the facts change, I change my mind.  What do you do, sir?”

– John Maynard Keynes

Common Sense Idea:  If a stock you own reduces its dividend, it is paying you less over time instead of more.  This is the opposite of what should happen.  You must admit the business has lost its competitive advantage and reinvest the proceeds of the sale into a more stable business.

Financial Rule:  Sell when the dividend payment is reduced or eliminated.

Evidence:  Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Source:  Rising Dividends Fund, Oppenheimer, page 4

Rule 7 Picture


Rule 8:  Portfolio Management


Rule # 8 – The Hedge Your Bets Rule

“The only investors who shouldn’t diversify are those who are right 100% of the time”

– John Templeton

Common Sense Idea:  No one is right all the time.  Spreading your investments over multiple stocks reduces the impact of being wrong on any one stock.

Financial Rule:  Build a diversified portfolio over time.  Use The 8 Rules of Dividend Investing to rank high quality dividend growth stocks.  Buy the highest ranked stock of which you own the least each month to build your diversified portfolio over time.

Evidence:  90% of the benefits of diversification come from owning just 12 to 18 stocks.

Source:  Frank Reilly and Keith Brown, Investment Analysis and Portfolio Management, page 213

Real Life Examples

I have selected 3 of the top 10 high quality dividend growth stocks using The 8 Rules of Dividend Investing so you have an idea of what businesses fit the 8 Rules:

The majority of 8 Rules stocks are well known businesses with a long history of profitability. They are familiar household names. This is because they have been so successful for so long. I personally feel a sense of relief knowing I am invested in tried and true businesses that have withstood the test of time.

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