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Wed. Nov.

18, 2009D4Lclassics, commentaryShareThis

A Winning Investment Strategy

We all want to succeed in everything that we do, including investing in the stock market. Though I have no analytical data to
back it up, I am convinced that most people will lose money in the stock market over their lifetime. So why do so few people succeed at investing?
Could it be that an individual’s desire to succeed be a significant reason for their failure.
When discussing investing with various people I come in contact with, the conversation always follows a similar track. Usually, one of these:
1. The person will mention a few stocks they did well with, then upon probing will admit overall they were down and they are looking for a new
strategy to follow.
2. The person will make a broad statement like ‘I’ve pulled everything out of the market it is just too risky.’ When pressed they admit to losing
money not only this time but at other times when they abruptly exited the market.
3. The person will concede that after significant losses they turned their money over to a professional.
Obviously, there are some success stories, and some of them are even believable. Due to the 2008 market downturn, most people are now comfortable
admitting losses because they know they are not alone. When you are losing 10% a year while the market is going up 20% a year, its harder to fess-up
since you feel you are the only one losing money.

Why do so few people succeed at investing?


All the pieces to answer this question were presented above. People want to succeed, but don’t know how. So they try to follow someone (or something)
that appears to be succeeding. A friend at work, or a talking head on a business show mentions a stock or strategy that is out performing the market, and
the investor jumps on board. Unfortunately, he or she is late to the party and the run-up either stalls or reverses. Fearful of a greater loss the investor
sells out and moves to the next hot stock or strategy. Eventually, they permanently exit the market or turn their money over to a professional that may,
or may not, improve on their performance.

A Winning Investment Strategy


People do make money in the market, but it is not by following the talking heads or a tip from a friend. Long-term success in the market is based on a
sound fundamental investing strategy that the investor is so confident in, that he or she will follow it in both bull and bear markets. For me, this is
a value-based dividend growth strategy. My goal is to generate a higher dividend income than the previous month through the purchase of select
dividend growth stocks. Here are some of the things I look for in an investment:

I. Long History Of Consecutive Dividend Increases


One indication that a company will continue to increase their dividends in the future, is a long history of consecutive dividend increases. Companies such
as Dover Corp. (DOV) [Analysis], Genuine Parts Co. (GPC) [Analysis], Procter & Gamble Co. (PG) [Analysis], Emerson Electric (EMR) [Analysis]
and 3M Company (MMM) [Analysis] have all increased their dividends for more than 50 years.

II. Strong Free Cash Flow


Just because a company has a history of increasing its dividend each year, does not mean it will continue to do so in the future. We can’t know what
management is thinking, but we can look at the financial statements for clues of the sustainability of the dividend payment. Dividends are paid with cash,
so the first place I look is at the company’s ratio of dividends to free cash flow (free cash flow payout). As a general rule, I prefer a number less than 70%.
Companies such as United Technologies Corp. (UTX) [Analysis], Nucor Corp.(NUE) [Analysis] and Aflac Inc. (AFL) [Analysis] all have free cash
flow payouts of 30% or less.

III. Low Debt To Total Capital Invested


The ability to generate enough cash to cover the dividend is only one part of the cash puzzle. One must ask, ‘Is the cash already spoken for?’ One of the
larger uses for cash is in servicing debt. As a measure of debt levels, I prefer a company to limit its debt to total capital to no more than 45%. Many
companies, such as Johnson & Johnson (JNJ) [Analysis], Coca Cola Co. (KO) [Analysis], Chevron Corp. (CVX) and Automatic Data Processing
Inc. (ADP) [Analysis], operate at levels below 35% of debt to total capital.

IV. Excellent Dividend Fundamentals


Not to over-state the obvious, but the company needs to be a good dividend investment. Put another way its dividend, over time, should significantly out-
perform “safer” investments to compensate the investor for the equity risk. Companies such as Abbott Laboratories (ABT) [Analysis], McDonald’s
Corporation (MCD) [Analysis] and Eli Lilly and Company (LLY) [Analysis] all have excellent key dividend metrics.

V. Trading At A Fair Value


Once we find everything we are looking for in a great dividend stock, there is one final question – ‘Is the stock trading at a fair value?’ Given the emotional
nature of the market, a stock can be fairly priced today, over-valued tomorrow and under-valued the next day. You need to know what you are willing to
pay for a stock going in. This is the area I will sometimes compromise in by paying a little more for great dividend fundamentals, but I know my limit prior
to placing a buy order.
A great football coach once said ‘It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.’ Investing success
doesn’t just happen, we must pursue it and engage it.

Sym Name Last Price % Change

ABT Abbott Laboratories 48.93 -0.16%


ADP Automatic Data Processing 41.89 1.04%
AFL AFLAC Inc 50.51 1.32%
CINF Cincinnati Financial Corp. 27.55 1.14%
CL Colgate-Palmolive 83.47 1.09%
CLX Clorox Co 65.43 0.75%
CNI Canadian National Railway 62.64 2.20%
CTL CenturyTel Inc 35.56 0.06%
CVX Chevron Corporation 73.52 0.11%
ED Consolidated Edison, Inc. 46.30 0.61%
EMR Emerson Electric Co. 50.57 3.54%
GPC Genuine Parts Co 43.10 1.06%
HCP Health Care Property 35.13 0.49%
HGIC Harleysville Group Inc. 31.98 -0.12%
INTC Intel Corporation 21.69 -0.41%
ITW Illinois Tool Works Inc 43.31 2.65%
JNJ Johnson & Johnson 57.63 1.07%
KMB Kimberly-Clark Corporation 63.64 1.08%
KO The Coca-Cola Company 54.75 0.90%
LEG Leggett & Platt Inc. 21.37 0.23%
LLY Eli Lilly and Co 35.17 0.06%
MCD McDonald's 69.90 -2.10%
MMM 3M Co 86.17 1.68%
NNN Commercial Net Lease 23.21 0.65%
NUE Nucor Corp 39.84 0.43%
O Realty Income Corp 32.11 0.78%
PAYX Paychex Inc 26.64 1.22%
PEP PepsiCo, Inc. 64.45 0.37%
PG Procter & Gamble Co. 61.91 0.88%
PGN Progress Energy, Inc. 41.81 0.36%
SYY Sysco Corp 30.94 1.18%
T AT&T, Inc. 25.54 0.12%
TEG Integrys Energy Group Inc. 47.73 0.87%
UTX United Technologies Corp 70.90 1.97%
WMT Wal-Mart Stores, Inc. 51.67 1.59%

Sym Name Last Price % Change

AOD Alpine Dynamic Div. Fund 5.36 -1.11%


BIV Intermediate Bond ETF 83.98 -0.27%
BLV Vanguard L-T Bond ETF 82.19 -0.39%
ETO Eaton Tx Adv Glbl Div. Fd 18.47 0.66%
LQD iShares Inv. Gr. Corp Bond 109.63 0.13%
MLPI Alerian MLP Infrastructure 27.60 0.07%
PCY Emerging Markets Debt 26.73 -0.04%
0.26%

PFF Preferred Stock Index 38.80