When done correctly, a thorough quantitative and qualitative evaluation takes a significant amount of time to complete. Most stocks are not worthy of that level of evaluation. So how do you know when a stock deserves further evaluation?
As part of my process, I employ a pre-screening model to determine if the stock merits additional evaluation. The pre-screen is designed to determine if any of the following purchase obstacles are present:
- NPV MMA Differential less than Zero: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? I will never buy a stock as a dividend investment, if I can earn higher income, over time, in a money market account.
- Dividend Decrease Within the Last 10 Years: When a dividend investor buys a stock the anticipation is the dividend rate will increase over time. The quickest way a stock can exit my portfolio is to decrease its dividend.
- Held Dividend Constant Within the Last 5 Years: If I own a company that is going through hard times and they have to hold the dividend flat for a year, I will decide whether or not to sell the company based on its future prospects. However, I will not buy a company that has held it dividend constant within the last 5 years.
Tomorrow in Part II, I will post a link to the Pre-Screening Excel Spreadsheet and discuss how to use it.