This post introduces another comprehensive book for dividend growth investing – The Single Best Investment: Creating Wealth with Dividend Growth. I wrote reading notes before for another great dividend investing book, The Ultimate Dividend Playbook, which you can find here.

I decided to use a different structure in the notes. Let’s go over some widely introduced common topics first. Then I would like to emphasize a few narratives uniquely available from this book.

TL;DR;

The more investing books I read, the more I realized almost all long term investing books point to investing in same types of companies: high quality stocks with products that people will persistently require to buy, creating durable demands and thus long term returns.

This book is no exception – the author calls those high quality companies with dividends growth the Single Best Investments (SBI).

A SBI should have reasonably high yield and quality growth, including:

• Yield 150% higher than the market average yield, which usually translates to at least 3-4%.
• Free cash flow based payout ratio is below 60%.
• Earning per share is expected to grow at least 5%-10% long term, but ideally 10%+ is the best. Check the past 10 years of annual growth rate of the company and determine if the similar growth rate will continue in the future or not.
• Low debt and meet minimum credit ratings. If you don’t have access to the report of professional rating agencies like S&P or Moody’s etc, which I don’t either by the way, using a combination of other debt related factors like debt trends, interest coverage, etc. can already give you a rough estimation of the company’s debt situation.

A SBI should also be qualified for a list of non-quantitative checks:

• Management Quality
  • Integrity: did the company ever mislead investors with suspicious activities like accounting errors, aggressive accounting practices, or hiding material information, etc?
  • Past performance during difficult times – How did the company hold up in the past difficult times (economic recessions, industry downturns, etc)? Especially if you are looking at buying the company during a currently difficult timing, knowing that the management had come back in the past would be real plus.
  • Acquisitions: acquisitions are hard things to do correctly and profitably. Normally management should just return money to investors via dividends or buybacks, but that doesn’t mean there isn’t successful acquisitions. Avoid companies using acquisitions as major growth drivers or having a track record of unsuccessful acquisitions.
• Nature of the business
  • Can the market this business is in provide moderate and consistent growth? Avoid new markets as plague as they haven’t been proved with long term moderate growth.
  • Does the company involve repeating sales? Most necessities and addictive products keep customers buying to drive durable growth.
  • Does the business have a growth point (or as described in the book, a growth kicker)? It could be a new improved product, a new department, a new selling point, a new submarket, etc. Those things do not only keep the moderate growth, but also potentially can accelerate the growth to another level.
  • Avoid hot names, pyramid marketing, network marketing, or resellers.

All in all, a SBI with both the above quantitative and qualitative traits is called a triple high – high quality, high dividend yield, and high growth of dividend. SBIs certainly belong to a rare breed on the market. Your job is to find them, buy them at the right time, and watch them grow.

Things I Find Particularly Interesting

Undervaluation Does Not Exist

We live in a world where people use undervaluation and overvaluation widely on a daily basis. Analysts with different levels of skills tell clients this stock has X% upside or that stock has Y% downside. The truth is, the author believes, that the undervaluation and overvaluation calls are just individual perspectives. At any point of time, because of the advance of technology capable of distributing information to millions of people in a split second, the share price of stock can quickly integrate any new information and reach a new reasonable price.

Shall it be a price surge resulted from an earnings beat, or a plummet caused by a scandal, the market is quick enough to reflect the new factual piece and adjust the price accordingly. If you still think some stock is undervalued, that is your perspective, that is your thought on what could happen in the near or far future. It doesn’t mean the stock is improperly valued at this moment – the share price is fair valued which incorporates all currently available public information about this stock.

Now if the stock you identify as undervalued is a SBI with triple high traits, again that’s high quality + high dividend yield + high dividend growth, the likelihood that your perspective may come true increases significantly. In fact you should always follow SBIs you like, spot their weakness periods, and make sufficient bets on them during their weakness knowing that they have good chances to come back.

Relative Strength as Buy Signal

Another interesting idea the author has, is that he uses relative strength to identify buying point. Relative strength is, simply, how a stock has performed relative to the overall market. There are lots of derived relative strength technical indicators – any indicators that can tell if a stock is relatively stronger or weaker than the average market should do the job.

The author uses six months of relative weakness and then followed by a notable increase in relative strength as a signal to enter a position. Personally I am not a fan of technical analysis. I don’t believe there are any technical indicators that can persistently outperform buy-and-hold styles of investment over long term.

I have back-tested sufficient amount of technical indicators. The results show that the vast majority of them have outperformed market during some periods and underperformed in other periods. Overall they are just wash and make returns worse due to fees and slippages from in-and-out of the market.

However you do not have to pick stocks purely based on technically analysis. I also have the impressions that Relative Strength and Moving Averages work better than other more specified technical indicators. They are simple and show genuine trends when applied on daily charts – unlike other technical indicators focusing on shorter period of time and suffering from overfitting and noises. It is refreshing to read the author mentioning the relative strength as buy signal. I will carefully use relative strength in my future dividend stocks selection as well.

Adjust Portfolio Yield Based on Market Risk Level

One last interesting viewpoint the author has in the book is this: Higher income generally means less risk and less total return. Lower income generally means greater growth but also greater uncertainty. Theoretically you can use this characteristics to tune your portfolio. Keep more high yield SBIs during market hypes and keep more low yield SBIs during market bottoms.

The bottom line is that your tilt on an SBI portfolio is an analogue to a conventional asset allocation. Timing the market is dangerous and error prone. However slightly tilting portfolios is a valuable technique during market extremes.

Things I Do Not Completely Agree

Bonds are useless due to low long term returns

The author thinks you should not invest in bonds because of their lower long term returns compared to stock markets, and especially compared to SBIs.

From my perspectives, bonds are fantastic assets to diversify from stocks. They provides yields and upsides. Although they do not provide sufficient upsides versus stocks, they go up at different times from stocks so reduce the overall portfolio volatility. A true investor understands that diversification significantly reduces the psychological pressure in turmoil times.

On the other hand I fully understand since this is a book about dividend growth investing, the author wants to show the superiority of dividend investing over bonds investing.

Other Technical Analysis Indicators

As mentioned earlier in the notes, I do not believe technical analysis that much. I may try to use relative strength as buy signal. However I do not intend to interpret the immediate price directions after buying.

The author is not too far apart from my opinion. He thinks technical analysis is of second importance. You still need to do most of the hard work to find stocks with triple high traits.

The author mentions some other technical analysis indicators anyway. One of them is selling climax – when stock plummets to a new low with significantly heavier volume. Selling climax usually indicates a bottom of the price slide. I don’t think it is reliable that the bottom it indicates could be very local. You could have selling climax once and once again periodically and the price continues to go down. It doesn’t have statistical value to determine if a downturn is over. Perhaps if you pick SBIs correctly, the selling climax work better but I will not count on it.

Disclaimer: The information contained on this site is provided with author’s personal opinions and is not for recommendations or solicitations of investments. Readers should consult professional advisors for more complete and current information to make investment decisions.