Myron J. Gordon wrote the classic paper “Dividends, Earnings, and Stock Prices," in May 1959. In this paper he showed that a dividend growth stock has 2 components of return, yield and dividend growth. I have simplified this finding into a quick screen for dividend stocks. I use the metric fair P/E= %yield + %(5-year average annual dividend growth rate).
I use a minimum 4% yield for initial purchase of dividend growth stocks. I would like the 5-year dividend growth rate to be on the order of 10% per year. It should be noted that high dividend growth rates are unsustainable in perpetuity, thus a stock must have good earnings growth and a strong balance sheet to meet my criteria.
Source: Seeking Alpha
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