When I first got into the financial industry, I was an assistant on a trading desk, eventually working my way up to trader.
Before I knew how to analyze a company by reading balance sheets and income statements, I learned about stock charts.
Two key concepts in reading stock charts are:
- The trend is your friend.
- A trend in motion stays in motion.
Essentially, what these two concepts mean is that a stock will continue moving in the same direction until it doesn't anymore. How's that for insight?
But when you look at a chart of a stock that is heading higher, although there are some minor corrections, it often moves on a diagonal line (called a trend line) upward. Stocks traveling along one of these trend lines usually continue until something changes their direction. The cause of the change of direction could be a bad earnings report, bad economic data, or a large institution selling its shares. Frequently, once the trend is broken, the stock will reverse.
I bring this up because the same can be said about companies that raise their dividends.
Typically, a company with an established trend of increasing its dividends will raise them again next year and the year after that and the year after that . . . unless it becomes impossible to do so. Management knows that investors have come to expect the dividend increase every year and any change in that policy will send them running for the exits.
I call these companies Perpetual Dividend ...