4 Rules for Stock Investing from Benjamin Graham

Dividend investing (farming) is considered a form of defensive investing by the trading class.  It’s defensive because dividend stocks are generally less volatile than growth stocks, for instance.  This means div stocks typically won’t see huge value appreciation but shouldn’t experience large declines either.  And any decline they do experience can be partially offset by dividend distributions.  Hence defending against losses with limited potential.  Or so goes the theory.

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Intelligent Investing was characterized in the last post as being less about raw intelligence than persistent fortitude; the ability to stick with the process.  Although the view is rather philosophical, it’s not intuitively practical.  Fortunately, 114 pages into Graham’s work, he provides 4 specific and practical rules when selecting common stock for the Intelligent Investor’s portfolio.

Diversification:  Per Graham, diversification should be adequate, but not excessive.  This might mean a minimum of ten different issues and a maximum of thirty.  The Dividend Farmer’s post on investment diversification  covered the probability underlying this stratagem and proposed a portfolio of 20-30 well selected stocks, possibly less, to mitigate investment risk through diversified holdings.

Size:  Selected companies should be large, prominent, and conservatively financed.  Large, prominent firms carry the notion of substantial size or market capitalization of roughly $10 billion and occupy a leading position in their respective industry.  As for conservatively financed, Graham indicates such firms should have a book value per share that’s at least half its current market value.

Dividend Payments:  Each company should have a long record of continuous dividend payments; at least 10 consecutive years.  An earlier post on Dripinvesting.org offers visibility into how many companies are available that meet or easily exceed this guidance.

Price:  Graham suggests a limit on the price an investor is willing to pay for a stock investment that’s no more than 25 times its average earnings.  Since growth stocks frequently have price to earnings multiples well in excess of 25 times, this benchmark is a reasonable guide for staying within the bounds of defensive investments which suits this Dividend Farmer well.

What does this mean if you’re interested in Dividend Farming?  The diversification rule is well covered in a related post linked above. 

Size can be readily determined by using Yahoo Finance to investigate the firm in which you’re interested.  Plug the company name or ticker symbol, if you have it, into the search bar and the firm's profile page appears.  The Summary tab provides the firm’s market capitalization or size in the first line under the heading. 

Dividend payment history is located on the same Yahoo page under the Historical Data tab.  Click the Historical Prices drop-down menu and select Dividends Only.  What you’ll see is a string of dividend payments and payment dates.  This means you’ll have to scroll through the dividend payment dates and determine the length of history on your own. 

Alternatively, you can go to the previously referenced DRiP Investing.org and find the information in a handy Champions, Contenders, and Challengers (CCC) spread sheet.  Within that sheet the number of years of consecutive dividend payments is clearly provided.

As for the price, the same CCC spreadsheet offers up a 5-year Price to Earnings Growth figure.  Alternatively, you can find a Trailing Twelve Months (TTM) Price to Earnings figure on the same Yahoo Finance page Summary tab for your firm along with the Market Capitalization.  The TTM data will be 3 lines below the Market Cap figure.

With the two resources mentioned, DRiPInvesting.org and Yahoo Finance, you can do plenty of the research required to find good investment ground.  If you’re working through a large brokerage like Schwab, TD Ameritrade, Fidelity, or others, you likely have access to a host of similar tools to help you determine where you’ll plant your dividend investment seeds.  From there, keep on farming.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.