The most successful investor in history has some very solid, fundamental and simple guidelines for the way he chooses stocks. I plan to implement the same guidelines with an emphasis in seeking high dividend stocks.
I’ll use 5 rules that Mr. Buffett uses, and add my own high-yield investor twist.
1. Ensure The Business Is Solid & Consistent w/Dividends
Mr Buffett seeks companies that he’ll feel comfortable investing in if “the stock market closed for 5 years”. This means that he invests in companies that show promising growth, earnings and overall performance in the forward projecting years. For finding high-yield stocks, you’d want to implement this same strategy. However, besides strong overall performance, you want to make sure the company your investing in has a strong past history of paying dividends at stable, consistent rates. This means try to find companies that haven’t drastically changed their dividend payouts, or ever stopped paying dividends. Always check a company’s fundamentals through your own due diligence, but also ensure that their dividend payouts are consistent and reliable.
2. Emerge Yourself In The Company’s Business
Investing is businesses that you understand is a critical component of Mr.Buffett’s investing strategy. This is an important element for successful investing for us beginning investors also. We must understand the fundamentals of the businesses we invest in, because once you invest in the stock, you are now an owner. Does it make any sense for an owner not to understand the business to which he holds financial interest in?
The answer is: NO, it makes absolutely no sense.
Also, it will make reading financial reports easier if you understand how they make money, and it will enable you to project your own analysis of their future earnings, growth, etc. You need to understand how the company makes money to know where the value of the stock is derived from, and their cash flow is a good predictor of future earnings and dividend payouts.
3. Trust The Shot-Callers
Warren Buffett is a firm believer in strong management. It makes a lot of since to want capable and intelligent managers to be in charge of the business you’re investing in.
The way I envision it, is that the company I’m investing in IS my own business that I’ve entrusted to the hands of managers. This helps me make it personal, and from there, I’ll seek and destroy all available information, news, or social profiles I could find on the executive management. Using a website like LinkedIn, and further investigation with Google, should give you a basic understanding of the managers’ past history, their prior works and other important information.
4. Look For The Cigar Butts
Actually a term coined by Benjamin Graham, Warren Buffett has put it in excellent practice and it is now regarded as a pillar to his investing style. In simple terms, cigar butt = cheap stock. Keep in mind, that just because it is cheap doesn’t mean it’s a good deal.
You do want to further assess the stock’s value by implementing some valuing metrics, like this one as an example:
If: Price/Earnings X Price/Book Value IS LESS THAN 22.5
Then: This company may be worth investing into after further analysis.
This is an actual metric Warren Buffett used while working with his mentor, Mr. Graham. It could prove a useful starting point into your analysis of company’s under your radar.
5. Invest It & Forget It (and happily collect the dividends!)
Once you’ve completed your thorough analysis of a company, and have finally decided to invest into a business THAT YOU NOW OWN a part of, you must be prepared to let it conduct it’s business. Warren Buffett stresses that successful investors do not keep their portfolio at the mercy of the media or market and public opinion.
Just because your company endured a horrific public relations attack or scandal does not mean that you have to sell it, if it doesn’t directly affect the means to which the business makes money. We must remember that the market has a very short term memory, and more often than not, any PR disaster eventually flies by the wayside and normal routines go on.
Find a company you are confident in after some intense analysis, and trust yourself enough to not get wrapped up in the buy, sell, buy, sell emotional and financial destruction that you will cause yourself.
Also, keeping in mind that we are dividend investors, and we could not reap dividends if we do not own the stock for a certain time.
Buy & Hold FOREVER.
Thanks for reading,
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