Finding Winners And Avoiding Losers When Dividend Investing

Many years ago, legendary investor Peter Lynch popularized a style of investing that sought to find growth companies selling at a discount to their long-term average price/earnings multiple. His “growth at a reasonable price” concept, or GARP, is a useful strategy, so we adapted it for dividend investing. You could say our GARY concept (growth at a reasonable yield) is GARP’s yield focused equivalent. With interest rates at historic lows, producing income from equity or bond investments has been a challenge. GARY investing provides a framework and a discipline for finding sound companies producing above average dividends and buying them when they’re cheap.

For yield-focused investors, pursuing the highest current dividend payouts can be rewarding but it can also be risky. Chasing yield might lead one to buy shares in a company that is about to cut its dividend. Variable dividends can also be problematic. The strategy aims to buy stocks of good companies at a time when their dividend yields are above their long-term historical averages. Because dividend yields increase either when a company raises its dividend or its stock price declines, using GARY analysis enables us to find sound companies often when they have fallen out of favor or hit a stumbling block.

Source: Forbes

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