The foundation of the Quantigence dividend growth investing strategy is a score we assign to each stock based on seven key factors that describe the ability of dividend growth stocks to keep paying and increasing dividends. We call these scores “Q-scores,” and they allow us to compare dividend growth stocks objectively to find those that are most likely to increase their dividends. We calculate Q-scores using a proprietary method developed by our research team that utilizes the following seven factors.
1. Years Paying Dividends
We start with an exclusive club of dividend champions – those companies that have at least 25 years of consecutive annual dividend increases under their belt. Companies that have achieved this feat will typically do everything they can to preserve that track record. The longer the history of dividend payment, the higher this value becomes, the more it contributes to the Q-score.
2. Market Cap
As previously discussed, we start by excluding any dividend champion with a market cap of less than $10 billion. Large companies are more stable, and we’re specifically looking for stability to weather periods of market turmoil. After applying our market cap filter of $10 billion, we’re left with a universe of ~70 potential stocks which still have a large market cap variance ranging from $10 billion to $402 billion. The bigger the market cap, the bigger this factor becomes, the more it contributes to the Q-score.
3. International Sales
A company that only does business in a single country is more risky than a company with geographically diversified revenue streams. We reward companies with international sales and penalize companies that do most of their business in a single country. Companies that derive more than 70% of revenues internationally receive the maximum reward. Companies that derive less than 20% of revenues from international clients receive a penalty. Utilities companies and real estate investment trusts (REITs) have no international sales due to the local nature of their business, so they are neither penalized, nor rewarded.
4. Five-Year Dividend Growth Rate
We reward dividend growers for having 5-year dividend growth rates above 5% per year and penalize those with dividend growth rates below 5%. (We annualize quarterly dividend payouts.)
5. Ten-Year Dividend Growth Rate
We reward companies for having 10-year dividend growth rates above 4% and penalize those with dividend growth rates below 4%. Ten years demonstrates more consistency than five years, so we increase the reward here compared to 5-year dividend growth.
6. Dividend Yield
The dividend yield is the ratio of a company’s annual dividend compared to its share price. It approximates the return an investor can expect from the dividend payouts over the next year assuming the dividends and share price remain the same. Even with a high dividend growth rate, a low yield can take a long time to grow into something meaningful. On the other hand, a high dividend yield seems attractive, but it is no guarantee that dividend payouts will keep increasing. We penalize any company with a yield under 1.5% and reward higher yields – the higher the yield, the more it contributes to our Q-score.
7. Dividend Payout Ratio
The dividend payout ratio is a buffer of sorts that reflects the ability for a company to continue raising dividends, even if earnings are not growing. We penalize companies with a payout ratio of 90% or higher. REITS are neither penalized nor rewarded here because they are required to pay out all profits to shareholders.
The Final Q-score
We then sum up these seven factors to produce a Q-score for each stock in our universe. We can then begin to perform relative comparisons to see which are the best quality dividend growth stocks – the ones most likely to grow their dividends in the future. You can go to our Q-score calculator and give this a try yourself.
In future iterations of the Q-score calculator, we will expand the universe to include stocks with smaller market caps, shorter periods of dividend increase, and international listings. (We would like to involve our users during our product development process, so please don’t hesitate to reach out to us using our contact form if you have any comments or suggestions regarding our investment universe.)
We can now use our Q-score calculator to build a dividend growth portfolio.