The 10/10 Test

Our 10/10 Test is simple: we invest in companies that 1) consistently pay dividends at an increasing rate that averages at least 10% per year and 2) pay those dividends for a minimum of 10 consecutive years

A company must pass this 10/10 Test to be included in our dividend growth portfolios. To remain in our portfolios, companies must continue to pass this test; whenever the 10-year trailing dividend growth rate declines below 10%, we eliminate them from our clients’ portfolios.

Past performance does not guarantee future results and a number of factors both positive and negative affect stock prices.

There is no guarantee that this investment strategy will succeed. The strategy is not an indicator of future performance. Investment results may vary. The investment strategy presented is not appropriate for every investor.

 

Research

In excess of 100 companies pass the 10/10 Test. In our view, most qualify as sound businesses, but we use fundamental analysis and market perspective to determine what we believe should make the best investments. We have followed many of these companies for years and our research efforts are comprehensive. We seek to understand what fundamental drivers generate each Company’s earnings, and the challenges and opportunities within industries. We prefer a record of steady results, strong cultures, and shareholder-friendly managements. When given the opportunity, we favor industry leaders, strong brands, and significant and growing global exposures. We try to understand the big picture, and anticipate what that will mean to our companies. We also look closely at the numbers, and the numbers behind the numbers. In summary, our research is designed to determine whether we think the company can continue to grow their dividend in excess of 10% per year.

Portfolio Construction & Management

Though we customize portfolios to meet individual client objectives and preferences, the Dividend Growth Strategy drives our stock selection. Each equity portfolio holds 25 – 30 Dividend Growth Stocks, across many industries and sectors. While strict sector weightings do not bind us, we are sensitive to diversification considerations. Although the majority of our stocks are large cap companies, our portfolios also include small and mid-size companies, providing further diversification. Portfolio turnover is generally low. As we construct each portfolio, we have the flexibility, for those clients seeking higher current income, to purchase securities providing attractive income yields, such as master limited partnerships (MLPs) in our portfolios. Additionally, MLPs may offer a tax advantage to investors. Knowing when to sell is more difficult than knowing when to buy. Our selling discipline is straightforward. We sell when we think fundamentals are likely to deteriorate, valuations are excessive, or we have a better investment opportunity. We also sell a stock when it no longer passes the 10/10 Test.

 

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"Compound interest is the greatest
mathematical discovery of all time."

– commonly attributed to Albert Einstein –

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The Rule of 72

For the last two years, the common stock of companies that Dividend Growth Advisors invested in has achieved an average dividend increase of over 18% per year. Using the Rule of 72, a formula used to calculate how long it takes to double your capital, an 18% annual increase of the dividend would take only 4 years to double that dividend.

Investment results are determined by time, not by how much you invest:

72 ÷ Interest Rate Return = Number of Years It Takes to Double Your Capital

For example, an investment made at a current interest rate of 4% will double in 18 years. Ten percent compounded annually doubles your income in just over 7 years, 15% compounded annually doubles in 5 years, and 20% doubles in about 3½ years.

Past Performance is not a guarantee of future results. The Rule of 72 is theoretical, and results will vary based on investments and fluctuations in performance.

About Master Limited Partnerships (MLPs)

According to Section 7704 of the Tax Code, passed by Congress in 1987, an Energy MLP is:

• Limited Partnerships that trade in the form of partnership units on securities exchanges much like stocks
• The typical MLP is structured with a General Partner (GP) providing management and the Limited Partners (LP) contributing the capital
• When GPs successfully grow business and profits, cash distributions may also grow
• A portion of the cash distributions received by LP unit holders in a given year is considered return of capital and is tax-deferred until the units are sold, since the cost basis is adjusted lower.
• 90% or more of the partnerships’ income must come from specific sources such as oil, gas, petroleum products, coal and other minerals, timber, carbon dioxide, and alternative fuels (ethanol, biodiesel, etc)
• Partnership assets are related to the production, processing, distribution, and storage of energy and are a necessary part of a modern economy

 

Why Energy MLPs?

• Income: Income is valuable in volatile stock markets
• Tax Advantages: Investors receive more of the income and pay less tax on that income, because MLPs are partnerships
• U.S. demand for energy is expected to grow over time
• Energy adequate to power a modern economy is not optional, it is essential
• Energy MLPs own the networks of storage facilities and pipelines used to transport that energy from the refineries to the end-users, thus playing a critical role in providing energy to the U.S.
• MLPs charge fees for transporting petroleum products and the Federal Energy Regulatory Commission regulates the transmission rates they may charge for interstate pipelines

Note: MLPs may not satisfy the initial 10/10 Test we use to screen common stocks. We use MLPs to fulfill a similar function that bonds often perform for portfolios. We can also structure a bond component for a portfolio when required. Because of their partnership structure, MLPs offer tax-advantaged current yields to most investors. Investors should consult with their tax professionals to determine whether MLPs are appropriate investments for them.

An investment in a Master Limited Partnership (MLP) unit involves risks that differ from a similar investment in equity securities including ownership controls associated with the limited partnership structure, high debt to equity ratios, and certain tax risks.

Confidence, built through results.

We founded Dividend Growth Advisors based on our confidence in the long-term power of rising dividends. Our belief in the Dividend Growth Philosophy drives our portfolio managers’ discipline in their use of our 10/10 Test for stock selection.

 

Wisdom, earned through experience.

We are a team of investment professionals whose experience managing client portfolios spans almost six decades. Our collective experience has given us the perspective to anticipate, not react to, market change and fluctuation. The knowledge gained through years of experience fuels Dividend Growth Advisors’ dedication to both the power of dividend investing, and to the investment objectives and financial needs of our clients.

 

Transparency, based on culture.

We strive for a straightforward and transparent approach with our philosophy, process, communications, and performance statements. We encourage close personal relationships with our clients. Dividend Growth Advisors believes that you should have uncomplicated access to both your Dividend Growth Advisors team and your portfolio. We do not use a call center or complex routing system. We answer your calls live. You will also have access to your account information through our office, and if you like to have 24-hour electronic access to your account, our custodians will provide you with the necessary information to do so. When questions or concerns regarding your account arise, we will be here to work with you to get you the answers and resolutions.

 

Dedication, built on our character.

At Dividend Growth Advisors, our integrity and values shape the relationships with our clients. We know you by name, not an account number. We design and manage your portfolio based on what you need and want, not what a generic program says you should have. Moreover, we know what you need because we talk with you to learn and understand your investment goals and risk tolerances. We work with you to help you meet your goals, such as sending children or grandchildren to college, making a retirement dream into a reality, or helping your employees to secure their financial futures. Over time, we will continue to speak with you to make sure that we are managing your portfolio to meet your goals. When your goals change, we will help you to make the necessary changes to your portfolio.