The Key Thing This Giant Hedge Fund Looks For When Picking Stocks

The Key Thing This Giant Hedge Fund Looks For When Picking Stocks

about 4 years ago2 mins

Mentioned in story

Let’s not make any bones about it: picking stocks is hard. But here comes Man Group, the world’s third-largest hedge fund, to explain why it focuses on dividend growth to select between winners and binners 🚮

What does this mean?

As anyone who’s listened to our Pack on How To Value Stocks knows, the rate of future dividend growth is key when using the dividend discount model to value a stock.

The formula underlying the dividend discount model
The formula underlying the dividend discount model

Man Group argues that a stock’s dividend yield – the dividend payment divided by the share price – is mainly a short-term measure of how much it’s worth, while dividend growth gives a better long-term picture of a company’s health.

This chart shows the average contribution to returns from dividend yield, dividend growth, and equity-market valuation. As you can see, the longer you hold a stock the more important the rate of dividend growth becomes.

Source: MSCI, Man Group
Source: MSCI, Man Group

Why should I care?

Man Group reckons that screening stocks for solid dividend growth keeps investors away from companies unable to generate cash consistently. In addition, companies that regularly increase their dividends show that they’re looking out for shareholders over and above any other interested parties – like bondholders, unions, pension funds, or managers. Finally, paying dividends promotes “discipline” in choosing how to spend money – so a company must work harder to justify spending on internal projects or purchasing rival firms.

So how do you find stocks with strong dividend growth? Not many free online screening tools let you filter by historic dividend growth: but this one from Zacks does. There are also exchange-traded funds (ETFs) that track such companies, like the iShares Core Dividend Growth ETF. Its top three holdings are Apple, Microsoft, and JPMorgan and it has climbed slightly more than the benchmark Standard & Poor’s 500 Index over the past five years.

Source: Koyfin
Source: Koyfin
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