I keep it fairly simple with 7 parameters that companies need to meet in order to make. I use four of them to formulate my list of companies to watch. Once there, I then use 3 more to narrow the field.
This is the most important requirement to be a dividend growth investor. Duh... I look for a company with a track record of a few solid years of increasing their dividend. Sharing profits with owners of the company is the whole reason I invest. Well, that and retiring someday thanks to the effect of compounding dividends.
The ones with the longest track record are the S&P 500 "Dividend Aristocrats". These companies have increased their dividend payout for 25 or more consecutive years and have a market capitalization of $3 billion or more. right now there are 57 companies that have made the list.
But there are many, many more companies that have a solid track record of increasing dividends.
Here's a list of Dividend Champions, Contenders, and Contenders
Pick from this list.
Another thing to consider is to see if their increases surpass the current inflation rate.
A LOW P/E RATIO
A look into the Price to Earnings ratio is a good way to see if the stock is under or overvalued. It's the ratio of the share price to the companies' earnings per share. It's the price of expecting a profit in the future. The S&P 500 is around 22X as of October 2019. It also varies within sector and industry.
I look to find companies that are under about 19. I also look to see how they compare with their competition in the industry they are in.
A LOW DIVIDEND PAYOUT RATIO
Can a company sustain their dividend and have room to raise it? A company that is paying out a large majority or all of their profits have a hard time keeping up their dividend in the long run. Ive been burned by some of them in the past few years and now pay close attention to this.
I look for companies that are under 60% or so. The lower the better, as long as they pass the other parameters. For example, Apple is around 26% at the time of this writing. This means they have lots of free cash flow (as long as their debts are low) and have plenty of room to grow that dividend.
A MARKET CAPITALIZATION OF $3 BILLION OR MORE
I prefer companies with scale and a size advantage. Small cap companies are more risky. This is why I started with large cap companies. Once I grew a nice buffer of 50 companies, I then began looking for smaller companies.
Once a company meets these 4 categories (or at least 3 and real close on the 4th), I will start looking at some other parameters.
AN EARNINGS PER SHARE GROWTH OF 5% OR MORE
I am hesitant of a company that is stagnant and has difficulties growing. Of course there are exceptions to this, like with AT&T. It's a challenge for them to grow at fast clips unless they assimilate another company like a Borg.
A LOW PRICE TO EARNINGS GROWH
Ideally at 1%. This is a measure of the price of growth. I would rather not overpay for a company becasue they are growing at a good clip. In bull markets, this is more of a challenge, but can be found.
A LONG TERM TRACK RECORD OF EPS GROWTH
If a company has a long track record of growth, I believe that the odds of keeping up that growth is better than companies that do not have a tack record.
After all of this, I look at other things
I may look at which month of the quarter they pay the dividend in an attempt to balance out my earnings.
Or I may look at how much of their industry I already own (exactly why I still do not own Smuckers or Walgreens)
Of course, this is just a guide.
PLEASE DO YOUR OWN RESEARCH. I AM NOT RECOMMENDING ANY COMPANY WHATSOEVER OR TO FOLLOW MY RESEARCH METHODS.
This is just how I narrow a list from thousands of companies to a small handful.