My Simple Investing Criteria [Part 2]

Thanks for reading The Dividend Growth Newsletter!

Today I'll be sharing the qualitative criteria a company must meet for me to consider buying their stock.

If you want to join 1,108 other investors learning about dividend investing tactics and analysis, subscribe below:

If you like what you’re reading, please share the newsletter with your friends!

Also, check out my other articles here and find me on Twitter @DrDividend47!

Today’s issue is brought to you by Vint!

Vint - The Future of Wine Investing

Wine as a diversification strategy.

When it comes to diversification, the name of the game is spreading your exposure or risk.

Wine as an investment vehicle has returned historically 8% annually over 125 years, putting it right up with the most notable index funds.

For 124 of those 125 years, investing in the asset class was limited to those who had large sums of capital to acquire diverse collections, the logistics to source, store, insure, and sell (all while maintaining provenance and optimal conditions), and an encyclopedic knowledge of the space.

We at Vint saw an opportunity to use technology and modern financing practices to provide all of this under one roof.

We have built our platform to allow investors of all sizes to invest in fractional ownership of the most sought-after labels in the world. This model enables Vint to provide investors with exposure to a new asset class and diversification within that same asset class at a fraction of the cost.

Get started with as little as $25!

Now, for today's piece:

My Qualitative Investment Criteria

Highlights

• Companies must have competitive advantages that give them a moat

• I look for companies that are resilient during economic downturns.

• Long-Term tailwinds are great to see

• I love a company that's growing its market share.

Introduction

Today is part two of a two-part series I've written on the topic of my investment criteria.

I'll be sharing some qualitative criteria I look for in a company when I'm considering investing.

Some topics I'll be covering are:

• Company Moats

• Economic Resilience

• Long Term Tailwinds

• Market Share

Let's jump in!

Company Moats

A moat is a metaphor for a company's ability to sustain competitive advantages.

A company must have competitive advantages to remain viable in the future. One competitive advantage I like to look for is the uniqueness of a company's product offering. Does the company have a product that is nearly impossible to copy?

For example, semiconductor machine manufacturer ASML sells the most highly advanced chip-making machines. These machines required over a decade of research, and use over 30,000 parts – many of which are proprietary to ASML. It has taken decades to build a supply chain for its machines and the company has deep interwoven connections with its customers.

Any competitor has a tough road ahead if they want to compete with ASML.

(For a complete breakdown of the business ASML, check out my article here)

Another competitive advantage I look for is when a company can exhibit pricing power.

Pricing power is the ability for businesses to raise prices and pass off inflationary costs to customers. As long as demand doesn't decrease as a result of raised prices, the business has pricing power.

A great example of a business with pricing power is Starbucks.

Starbucks was able to raise its prices three times during the inflation-riddled 2022. Consumers didn't seem fazed as Starbucks posted decent earnings. Every time I drove by my local Starbucks the line was out the door.

A great example of a business with pricing power.

I also look for companies that have created a connected ecosystem of product offerings.

Apple is a company that comes to mind with a great connected ecosystem of products. It starts with the iPhone. Consumers buy the iPhone and all of a sudden they're looped into the Apple ecosystem. Within this ecosystem, consumers have device options of desktops, tablets, watches, headphones, and air pods.

But that's not all.

On the services side, Apple has done a fantastic job implementing a variety of products. In addition to devices, consumers can buy subscriptions for streaming, fitness, gaming, cloud storage, and even a credit card.

Once you become accustomed to this Apple ecosystem, it becomes very hard to switch out.

The Company Is Economically Resilient

I don't want to own companies that thrive only when the economy is good.

For example, a consumer discretionary company like Nordstrom will benefit when times are good and people are out shopping. But when times are tough and the consumer is stretched thin like they are now, companies like Nordstrom struggle. Clothing becomes one of the first expenses to be cut out. Inventories pile up, sales falter, expectations diminish, and the stock price trends downward.

My ideal company to invest in sells products that are in demand during any economic cycle.

Let's look at another consumer discretionary company: Home Depot.

Home Depot's business does have some cyclicality to it, when times are tough DIY customers are less likely to take on projects and remodel their homes. However, Home Depot doesn't just generate demand from DIYers. Landlords and Pro Contractors use Home Depot's goods and services regardless of the economic climate.

Things always need fixing, buildings will continue to be built.

That's not to say that Home Depot is immune to slowdowns, but it does benefit from demand for housing & building-related products.

We all need a place to live and housing is one of the most resilient markets there is.

The Company Exists In An Industry With Long-Term Tailwinds

If you were swimming, would you rather swim with the current or against it?

Chances are you'd rather swim with the current – it's easier!

That's how I like to look at businesses and their industry. I like businesses that operate in industries with tailwinds propelling them into future growth.

For example, you've probably seen how powerful Artificial Intelligence (AI) has become in a short time frame. From Siri to Chat GPT to autonomous machinery, it's becoming more engrained in our daily life. And I choose to own companies that I think will benefit from this long-term trend.

But not every investment has to be in the most cutting-edge companies.

Boring Consumer Staples companies have benefitted from long-term trends as well. Some of my favorite stocks are Costco, Proctor & Gamble, and PepsiCo. These companies aren't building technology that will light the world on fire, but they sell the stuff people want and need. Chances are 100 years from now people will still buy low-cost bulk groceries, toothpaste, deodorant, razors, soda, and snacks.

All products that Costco, P&G, or PepsiCo provide.

So to recap, companies that benefit from future long-term trends don't always have to be cutting-edge tech companies.

Companies that sell products we'll need in the future check this box for me, regardless of how flashy or new those products are.

Market Share

A company I'm interested in buying shares of has to be gaining or maintaining market share.

I prefer companies that dominate their sector, a good example of one is Google. Google dominates the Communications sector through a few channels: Internet Search, Productivity, and Advertising. 

The company is responsible for 90% of all internet searches and owns the two most popular websites in the world (Google and YouTube). These 2 websites combined see an average of 118.1 billion monthly users, more than the next 48 biggest websites combined.

Google also dominates the Productivity landscape. It hosts 9 products used by over 1 billion people. These products are:

1. Google Search - 3.6 billion+

2. Android - 3 billion+

3. Chrome - 2.65 billion+

4. Gmail - 1.8 billion+

5. Google Drive - 1 billion+

6. Google Maps - 1 billion+

7. Google Play Store - 2.5 billion+

8. You Tube - 2.1 billion+

9. Google Photos - 1 billion+

This doesn't even account for products like Google Translate, Google Calendar, and Google's office suite (docs, sheets, slides) each of which has over 100 million users.

Lastly, Google also accounted for 33% of all digital advertising. The next closest competitor was Meta with 15.4%. While Google's dominance has slightly shrunk over the past few years, it's still head and shoulders above the competition and I believe it has the user base to continue its dominance.

By having a dominant market share, a company will be able to continue reaching consumers and stave off competitors.

Final Thoughts

Over this two-part series, I've covered the qualitative and quantitative criteria I use to choose investments. 

To recap, the criteria I look for are:

• Company Moats

• Economic Resilience

• Long Term Tailwinds

• Market Share

• Free Cash Flow

• Dividend Growth

• Dividend Payout Ratio

• Shares Outstanding

• Corporate Debt

This list is just the tip of the iceberg that is my investing process. There are a handful of metrics I use to assess the financial health of a business, its earnings, and its dividends. I dive into all of these metrics in my book Stock Market Sniper. You can find it here.

But metrics aren't everything, the price you pay for a stock matters too.

That's where valuation comes in. I've just begun to move deeper into the art & science of valuation and I'm collecting insights from legends like Warren Buffett and Ben Graham. I will share what I learn with you all!

I hope you found it valuable to learn the things I look for in a potential stock investment. If you end up coming up with your own criteria or want to share criteria you already use, please reach out. I'd love to hear from you!

Thanks again and happy dividend investing!

Links & Memes

Seems like there's a tech company laying off employees every day. How long until Chat GPT makes the layoff announcements?

Props to this roommate's creativity:

Male birth control, with a plot twist:

Men should never be ashamed of the classic heart underwear:

The meme is funny but the horse's face sent me 😂

Is this facts?

Would you do this with your friends?

New Graphic!

I was listening to a podcast while I was on a walk and I came across this quote by author Ernest Hemingway:

Instantly I thought of the effects of compounding. Initially, I thought of compounding as it relates to dividend investing, but compounding can be found in multiple areas of life.

Diet, exercise, investing, and relationships – they all have compounding effects.

I came running home and ran straight to my computer to make this graphic. I hope you like it!

Like what you’re reading?

Subscribe to get free investing content sent straight to your inbox every Monday.

Don’t forget to check out my website full of awesome free resources to jumpstart your investing! 👇

Dr. Dividend | Linktree — linktr.ee

Thanks for reading, if you liked this issue remember to tell a friend!

Disclosure: The contents of this newsletter are in no way intended to provide financial advice. I am not a licensed Financial Advisor. The opinions expressed in this newsletter are for informational, educational, or entertainment purposes only. I may buy or sell any positions mentioned at any time. I do not and will not encourage you to buy any specific investment security. Everyone has different investment goals and finances, and what works for me may not work for you. Investments of any kind carry risks that may result in partial or total loss of capital. You should contact a professional and conduct thorough due diligence before making any investing-related decisions. This newsletter may contain affiliate links and I may receive a commission from the usage of any affiliate links at no charge to the user.