The Dividend Value Discipline™

The Methodology

As its name suggests, The Dividend Value Discipline™ brings together three critical investment filters: dividends, value and discipline.

Dividends: The First Leg

Stocks, and indeed portfolios, that provide a steady stream of income are inherently less volatile than those that do not (more stable, less chance of loss) - so we start by looking for securities that pay some form of income, or at least have an excellent prospect of doing so in the very near future.

Value: The Second Leg

We look for candidates that are clearly inexpensive. One of the screening tools we use is the price-to-sales ratio because it is a very hard number to fudge. We also use a variety of other measures including the price-to-earnings ratio and less well known, but extremely helpful tools, including internal rate of return and earnings consistency.

Once we have identified a potential candidate - the work begins. We now verify whether or not the candidate truly does represent good value or only appears to do so. We start by tearing apart the company's financial statements to establish whether or not what is represented is actually fact. Our objective is to come up with a number that we believe the company is worth. We then compare that number to what the company can be bought for in the marketplace. When we can buy it at a substantial discount, that company becomes a buy candidate.

Discipline: The Third Leg

Just because we have identified a buy candidate does not mean that we will buy the stock. We now look for evidence that the market is starting to recognize our candidate as being undervalued. We use a variety of technical tools to do this. One of the most helpful indicators is a positive 52-week price change. This gives us evidence that the stock has bottomed and investor interest is returning.

The discipline also works on the sell side. When we have enough evidence of investor interest waning, given the opportunity, we will sell the position to protect the capital, be it at a gain or a loss. Small losses we can stand - it is the big ones we must avoid.

The Target Return

The target return is 10% gross, or roughly 8% net of all fees. Depending on the need for income, we anticipate roughly one-half of the return coming in the form of income, dividends and/or trust distributions, while the balance will come from capital growth. Please understand that our focus is on absolute returns, not relative returns.

The Dividend Value Discipline Quarterly Market Commentary