Do you find yourself hesitating when looking to buy stocks, afraid of buying the wrong ones? Use a checklist to help your stock buying decisions. I use one myself to avoid indecision and paralysis by analysis.
How a checklist helps buying decisions
Using a checklist ensures the stocks you are considering qualify for your portfolio, avoids investor’s bias and discards companies that could hurt your portfolio, and helps to make better decisions faster. Answering the checklist’s closed-ended questions cuts down the noise.
After validating a company with your checklist, its stock either belongs in your portfolio or not. You press the buy button or move on. No more doubts!
Using the stock buy checklist
The checklist helps your stock buying decisions, but it’s also a great tool to validate if stocks you already own are worth keeping.
You can start your decision-making process by using the checklist, but it might be difficult to answer all questions without completing an analysis beforehand. I prefer knowing the company inside out first, then use the checklist to validate it just before buying (or not).
Start off by selecting and analyzing stocks:
- Screen for companies in sectors or industries you need.
- Restrict the list to only companies showing growth trends in revenue, earnings, dividends.
- Learn each company’s business model, upsides, and potential risks.
- Identify the best; those with strong cash flow generation and healthy payout ratios.
Caution! Payout ratios don’t tell the whole story. There are acceptable reasons for high payout ratios, such as large investments for future growth. Disregard stocks solely because of high payout ratios, and you might miss great opportunities.
Equipped with your list of candidates, use the checklist to validate and decide whether to add them to your portfolio. This increases your confidence when buying and supports your conviction when holding positions during challenging times.
Stock Buy Checklist questions
Here are my checklist questions, grouped in 4 themes, and why each one matters.
Allocation / Role
Knowing the role played by each of your stocks helps you reach your goals and lower your concern during market fluctuations.
Amount to invest as a percentage of my portfolio?I like new positions to be equally weighted; in a 100K portfolio with 19 stocks, I’ll grant a 20th position 5% weight of my portfolio (100/20 = 5%).
What’s the company’s sector or sub-sector/industry?
The sector and sub-sector, or “industry”, indicates if and how a stock fits in your portfolio. Is it in a core, income, or volatile sector? Is the industry already represented in your portfolio or not at all?
What’s my current exposure to this sector or sub-sector?
When over-exposed in a sector, disregard any stock of interest in this sector unless you are willing to sell one of your current positions.
What does this company bring to my portfolio that I don’t have?
Avoid “diworsification”. You want the best of several sectors/industries, not all the companies from the best industries.
What role will this company play?
What does it bring to your portfolio? Growth? Income? Safety?
Dividend
As a dividend growth investor, I put dividend information ahead of any other metrics.
Was the dividend cut in the past 10 years?
You don’t want dividend cutters. You’re interested in a stock that had a dividend cut? Ensure you know why it was cut and how the company will increase it going forward. “Hope” isn’t a successful investing strategy.
Was a dividend paid for at least 5 years?
I use 5 years to not ignore young but promising dividend growers. The 10-year horizon shows how the company reacted throughout a complete economic cycle which, on average, last 5 to 8 years.
Has the dividend increased consistently?
I want companies that constantly increase their dividend. It signals a growing business and a safe dividend.
Is there a minimum of 3% annualized dividend growth rate over the past 5 years?
This shows whether the dividend is protected against inflation.
What are the 5-year annualized growth rate (AGR) and last year’s AGR?
Compare the earlier trend vs. what happened in the last year. Investigate further when the recent dividend increase is smaller.
What’s the Chowder score?
The sum of the dividend yield and 5-year average dividend growth, this score is a good indicator of the dividend potential; low yield + high growth and decent yield + medium growth score well.
Safety
Shed some light on the dividend safety and health of the balance sheet.
What’s the payout ratio?
See if the number is scary or not. I won’t discard a stock because of a high payout ratio (above 100%), but I’ll investigate to understand why it is so high.
Has the payout ratio (or FFO payout ratio) increased in the past 5 years?
A growing dividend is great…if the company can afford it. If the payout ratio increases year after year, dividend growth will eventually slow down.
Has the company added debt or issued more shares? Why?
Many companies grow through acquisitions. While it’s often a great strategy, total debt must remain under control. If the company issued equity to finance acquisitions, revisit the EPS or FFO/share to verify if it diluted the value per share.
What’s the Refinitiv Credit Score?
I like the Refinitiv Credit Score because it’s included in the DSR stock screener.
A number from 1 to 100, it shows if the company has a solid balance sheet. The highest rated companies have little to no debt, e.g., Gentex (GNTX), Franco Nevada (FNV:CA), or lots of liquidity, e.g., Apple (AAPL), Microsoft (MSFT).
Growth
I favor healthy companies showing solid growth potential over mature businesses that are slowly, steadily declining, even if their yield is better!
Is there positive revenue growth over the past 5 years?
Revenue growth is the hallmark of growing companies. Without increasing revenue, it’s hard to grow profit and increase dividends. If there’s a huge jump or decline, go to the quarterly report to see reason behind it, e.g., a product launch, an acquisition, a divestiture, or other rare event.
Is there positive EPS growth over the past 5 years?
After revenue growth, time to check earnings growth!
Bonus question for both revenue and EPS: is there improvement over the last 12 months? A big jump 3 years ago could now be flatlining.
Is there positive cash from operations growth over the past 5 years?
EPS don’t tell you everything. Look also at the cash from operations trend.
Having checked revenue, EPS, and cash flow, you’re in good position to know if the company is growing or stalling.
Answering Stock Buy Checklist questions using DSR
At DSR, we offer tools to help you find promising companies and answer the checklist questions to make decisions faster and confidently: a stock screener with extensive list of metrics, portfolio models, a buy list, the portfolio builder, and quarterly reports.
Original PostEditor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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