In a recent episode of the Investing for Beginners Podcast, Andrew and Dave broke down how to analyze a stock’s potential by using dividend growth investing history.
I’ve taken a lot of the general takeaways and highlights and listed some of them below. In addition, I’ve included players to these episodes below so that you can listen along if you’d like too.
In general, if you’re going to be looking at something as all-encompassing as growth, you need to look at it on a period that is longer than simply just a couple of years.
For instance, let’s imagine that your #1 thing to look for is revenue growth.
That sounds great in theory, but if your company buys commodities that are then in turn sells those same commodities, and that commodity spikes in prices, the revenue will likely increase as well because the company will need to charge higher prices.
For instance, if the price of rubber doubles, tire companies will likely need to double their price to their customers to account for this huge increase in costs. That’s not going to increase their profits, but it will increase their revenue…and their costs.
Things like this make it unadvisable to look at growth in such a short-term period. A 7-10-year look is much more preferred than just a couple of years.
I know that this example might seem outrageous, but it’s not. In addition to this, things in a business can quite simply just fluctuate from year to year. Some businesses and industries are very cyclical so a short-term can really skew the outlook of a company, either negatively or positively.
Another key point that Andrew and Dave discussed is the importance to compare multiple companies against each other, so you can really get a good idea of who the strong performers are, and then also compare those companies against the S&P 500 during that same timeframe.
When you take a grouping of similar companies it will allow you the ability to somewhat take out some of that cyclical trendiness that you might see when comparing a random group of companies over a short timeframe.
Something that Andrew did was he went back and analyzed some of the best stock picks of his e-letter and they he noticed that they all had really good 7-10-year earnings and book value growth compared to the S&P 500.
This was a really telling point to me because Andrew said that this wasn’t really the reason that he picked these stocks, but it showed that simply looking at long-term growth can actually be a great indicator of future performance.
So, what types of things should you really be looking at when evaluating growth? In my opinion, the three most important factors are earnings growth, revenue growth, and dividend growth.
Along with these, it’s extremely important to look at the qualitative factors of the company such as their management structure and the people in their company. I challenge you to try to think big picture when evaluating a stock’s growth potential. Think outside the box.
Andrew referenced that one thing that really stuck out to him was that one-time Jim Cramer said that Caterpillar is a really good indicator of economic growth because as economic growth goes up, so does Caterpillar demand usually, so it’s a great indicating factor for you.
In other words, don’t constrain yourself to the typical thought processes – think big!
I hate to keep harping on the importance of time when evaluating a stock, but it is SOOO important!
One thing that I have commonly seen is that people will find a stock that they think looks enticing, then evaluate the history of that stock based on an arbitrary timeline to help fit their agenda. Do not cherry-pick your window! But, with that being said, you also don’t have to go in with an extremely firm 7-10-year minimum requirement.
For instance, let’s pretend that the trade war became much more severe and lasted for 5 years. If the trade war had then ended in 2025 and you were looking to buy a stock in 2030, do you really want to evaluate 5 years of trade war data that isn’t necessarily applicable now? No, absolutely not!
But if you were to decide to only evaluate 5 years of data instead of 10 simply because it made you feel better about your investment choice, then that, my friends, is confirmation bias, and I do not recommend doing that. Spoiler – it won’t work out well!
Assess Earnings and Dividend Growth, Company Size, and Personal Risk
I’ve talked a lot about growth in this post, but never let growth alone drive your decision to invest in a stock. As I mentioned, look at some of the qualitative factors as well and stick to your roots if you have any hard rules such as no negative earnings, no stoppage of dividend growth, etc.
Now, of course, if you were to invest in a small-cap company then you’d have much more opportunity to grow that investment, but it would also be much riskier in nature and able to drop down to $0 compared to a large, more steady, large-cap stock.
My personal opinion is that if you have over 10 years left before retirement, feel free to be a little risky with your investments. If you have 25+ then you should really be getting after it. If you have 40+ years, then you should be doing whatever is one spot less risky than going to a casino and putting it all on black at the roulette table.
Of course, I’m kidding, but I hope you get my gist.
The longer you have until your retirement, the better you are to take those risks as you’ll have that much more time to overcome any potential negatives while reaping the benefits of some major positives.
One of the most important things that you can do is understand that you likely will not find the 100% perfect stock to invest in. You should evaluate some stocks, find one that checks a lot of the boxes and avoids the major red flags, and then buy some so you have some skin in the game.
If you spend all of your time evaluating the company you will experience paralysis by analysis and you’ll find yourself being 65 years old, ready to retire, with a pile of cash that was never invested because you never actually did find that right company.
One thing that I’ve learned throughout my career is the importance to gather 80-90% of the information that you need and then make the best decision that you can because if you wait for that last 10-20% to get figured out, you’re going to miss out on many more future opportunities and the likelihood that what you learn in that last 10-20% is going to sway your opinion from what you already know is extremely low.
In summary, look at growth, avoid the red flags, and pull the trigger! But of course, invest with a margin of safety, emphasis on the safety.