Thread by @Vivek_Investor

I'm not an expert, however, this is my understanding of the concept "Dividend Growth Investing" 👇

As we all know that Peter Lynch classified stocks into slow growers, stalwarts, fast growers, cyclical & turnarounds.

Here we should ignore cyclical (including commodities) (1/n)

https://twitter.com/DividendGrowth/status/1517590039265435651

And turnaround.

Usually, slow growers are those growing less than the GDP rate, if we assume gross GDP growing at 7-8% these are growing at 4-5% annually.

The market does not like these companies because of their slow growth so they trade at low multiples, but (2/n)

Providing consistent dividends with a slight increase every year, because of the low multiple (PE) initial dividend yields look higher say, 5-6% ( higher than the pre-tax term deposit interest rates) but the growth is very low and the probability of capital appreciation (3/n)

Is very less, yes in comparison with the term deposits it is a good choice.

Another problem here is that these are either mature industry/ declining industry.

If it is a declining industry, it will be a "Dividend trap".

If it is a mature industry, the growth rate will (4/n)

Come down, 5% will come down to 3% and it continues at the same time the PE will also decline, so in the long-term such businesses prove to be a "value traps"

Now look at the fast growers (usually growing at 2-3X the gross GDP) if gross GDP is 7-8% these are growing at (5/n)

18-20%, these companies, either have narrow moats / no moats, very few companies are trying to build a wide moat.

These companies provide a little dividend (payout usually less than 20%) and reinvest profits in the business as they are in the growth stage.

Usually, these (6/n)

Businesses trade at high multiples.

Low dividend yield because of high PE & low payout.

If you choose companies which are building moats along with growth they will become "multi-baggers"

In no moats/ narrow moats businesses, PE will be (7/n)

Derated as growth slows down and turns out to be a "growth trap"

Finally, stalwarts / blue-chip stocks, these businesses are very dependable and have strong economic moats and growing a little higher than the gross GDP, say 10-12% and dividends are also growing at the same (8/n)

rate or a little higher because their capital requirements reduce as they become stronger.

These businesses are the ideal choice for dividend growth investing.

However, the problem in the Indian market, is currently these stocks are trading at a high valuation, because (9/n)

For various reasons (but if you do proper research, you'll find dozens of fairly valued stocks even now)

Best way to buy these businesses:

1. SIP.

2. Buy during a market correction.

3. As I said by doing research, you can find mispriced blue-chip stocks always. (10/n)

So, for dividend growth investing, choose:

1. Proven businesses.
2. Companies with strong & growing free cash flows.
3. Companies with strong economic moats/ niche businesses.
4. Buy during a market correction or SIP regularly/ do research to find mid-priced blue chips (11/n)

5. Invest for the long term.

Hope it helps, if not, ask any questions on this topic (End)

Divided growth Investing |

Finally, apologies for the boring long thread 😇

#EQTlearnings