Dividend growth investing is gaining popularity in the investment community for those wanting the compounding growth effect on income. The Dividend Aristocrat index is made up of 50 stocks from the SP 500 that have at least 25 years of increasing dividends. At Portfolio Cafe we take it many steps further.
Our goal is to hold the 10 most undervalued stocks for the best income and capital growth return. But just how do we determine what is undervalued? First we look at the stocks with the highest dividend yields, much like the Dogs of the DOW strategy. Then we examine which stocks have abnormally high yields when compared to their own 5 year track record. From this smaller basket of stocks we evaluate them with two complex ranking systems to ensure we getting the best of the discount pile. Our goal is to hold an optimum 10 stocks but we don't force it. When fewer stocks are recommended, such as in higher market risk situations, the portfolio automatically starts moving us toward higher cash holdings.