Our Recipe for Success: The VDG System
The beginning point for our continuous search for investment opportunities is our “top down” analysis which starts with an assessment of the current risk and reward for both fixed income (bonds) and equities as determined by where we are in the economic cycle. This forward-looking evaluation helps us determine which asset classes as well as economic sectors should outperform over time. Next we ask ourselves whether or not there is a thematic secular trend that is either evolving or already in place. This “Big Picture View” analysis is what allows us to form high-conviction opinions about which sectors and companies will be able to grow and flourish.
Stock Selection
The Ingredients
VDG stands for Value, Dividends and Growth. These are the main criteria for our disciplined investment selection process
Value: The Appetizer
The bottom line is that we look for investment opportunities that are inexpensive in relation to their potential. We enjoy searching for investment candidates that demonstrate good value on a number of different metrics. Examples of some of our screening criteria are free cash flow, price to earnings growth ratio, enterprise value and many more very helpful analytical tools. But this is just the beginning of our in-depth analysis of a company’s true worth.
Dividends: The Main Course
Investments that provide a steady and dependable income are much more stable than those that do not – so we look for securities that pay an attractive income, or at least have an excellent prospect of doing so in the very near future. If a company’s earnings per share are increasing, they can afford to increase the income they pay to shareholders but the caveat is that they shouldn’t pay out so much that the company is limited in reinvesting in their business. In order to examine this, one of the screening tools we use is the payout ratio. This helps us to determine whether or not a company has a healthy dividend policy. It’s a simple fact that companies that are able to consistently grow their dividends outperform those that do not.
Growth: The Dessert
We look for companies that provide good growth but at a reasonable price and we always keep valuation in mind. Companies we invest in for our clients have many of the following characteristics:
- Predictable and growing cash earnings
- A competitive advantage
- Large and growing market share
- Quality management teams with an excellent track record and significant equity ownership