We come back to our overview and continue with the rest of caution too, by diving down into the other matters regarding using dg and D SS screening methodology. Number one, not perfect. There are many other ways to find good dividend companies. In this course you've learned how to do so via the following mandates of dg and DS. But what I would like to point out here is that the conditions under the dg and DS mandate I've created are not perfect. For example, under the DS mandate, the conditions discriminate against cyclical and highly leveraged companies, and both mandates DS and eg discriminate against young companies with weaker revenue and inconsistent cash flows.

But having said that, the total returns from investing in ds or dg holdings are rather promising as you and I have already seen in the background Report. Although not perfect, the idea of dg DS have been tested by other investment experts like Ned Davis, of whom I am a fan of Ned Davis's comprehensive comparison studies on dividend growers and dividend payers type holdings is similar to idg and DS list. Looking at his research, which is this chart, the baby blue colored line represents his dg holdings, while the dotted red line represents DS holdings compared to the thick black line which is the s&p market returns. The filtering for both dividend growers and dividend payers is not as stringent as the filters we have for Digi and DS, and yet their overall performance has beaten the s&p many times over. So rest assured that if you spend the time to follow the filtering methods taught in this course, your dividend portfolio is expected to perform well or at the very least slack Better than the market.

Number two classification misdeeds. Adding on the screening models also doesn't take into account classification misdeeds from the management, a company that wants to understate its account receivable so as to mask its liquidity or ability to collect revenues can simply reduce the account receivables by transferring them to a controlled entity, reclassify them within the balance sheet and treat them as long term receivables or selling them externally. All these actions will result in a favorable current ratio. If the management can do that to receivable they likewise can do it to inventories. A company that wants to lower the ending inventory on its balance sheet for the current year can do so by reclassifying certain inventory costs as other assets. The management can then justify the classification on grounds that these units of inventory are held in public Preparation for future product launches and are not expected to be sold within a year or one operating cycle.

Based on my investing experience, many Chinese companies are often guilty of practicing this sort of sneaky reclassification. So please be aware, a company can also inflate its recorded cash flow from its operations. As mentioned cash flows ratios are really important to the dg and DS mandates. So, when a company classify activities like sales of long term asset as operating activities, the operating cash flow would be inflated. Again, these are weaknesses in my dg and DS screening methodology. So please take note number three dividend growth return.

Now a stock being ranked under the term dividend growth does not guarantee but the company will increase dividend rather it indicates only a higher Probability of increasing dividends or by other methods as they have the means to do so according to the numbers. by other methods, I mean that companies might reward shareholders through paying down expensive debt, saving up for a potential investment or conducting share buyback, which I mentioned earlier in the lecture. In America, a lot of companies conduct share buyback. This is because doing so essentially reduces the number of outstanding shares while maintaining the same level of profitability. shareholders who do not sell their shares would now have a higher percent of ownership of the company shares a higher price per share and the flexibility to defer attacks until shares are sold. From a company's perspective.

The benefits of share buyback are that it reduces the assets on their balance sheets and increases the return on assets and return on equity. Moreover, share buybacks provide greater flexibility for the company as there is no obligation to complete a stated repurchase program in the specified timeframe. So if the going gets rough, it can slow down the pace of buybacks to conserve cash. Although dividend payments are also discretionary reducing dividends is generally not an option, as nervous or unhappy shareholders may sell their shareholdings if the dividend is reduced, suspended or eliminated. How to analyze dividend stocks using qualitative factors? At this point, we've covered quite a bit of quantitative material on the company, mainly about filtering and ranking dividend stocks using quantitative measures like the ratios and percentage growth.

In this orange orb, we will look at the other side of the coin, the qualitative factors that supports both dividend growth and more importantly dividend sustainability of a company. As such, we put a sign in calculators and open our reading minds to analyze the economic moat of each of those dividend stocks you have selected so that you can have a reasonable degree of confidence that the companies in your dividend core holdings will be around and even thriving for the many years ahead. We now look at what it means to have a business economic moat. Buffett popularized the concept by describing a company's economic advantage over their competitors in the form of a moat surrounding a castle protecting the profit making idea. The more formidable the mode, the harder it is for other competitors to take away the business's market share. I'll go through some examples of what these economic moats are made of only the essentials once.

Economies of scale size matters. One of the reasons why large companies should be included in your core dividend holdings is because of their impeccable economies of scale. companies with size advantage may inherent pricing distribution, financing advantages or some other perks that a smaller company might not have. Large dividend paying companies like at&t, advi and target have advantages that their other small competitors they are not compete on, like pricing and quantity. Just something extra, you can use market capitalization to identify a large company. Large companies have market cap of more than 10 billion.

But to me any company more than 1 billion should be considered decently large. But this doesn't mean your whole portfolio should be made of large companies. On the contrary, small and medium sized dividend paying companies should also be considered provided their current management is doing all they can to conquer more market share in the relevant industry. Also note that a company might be small when comparing their market cap to To another competitor, but they should be considered big in their own respective industry. Or they might have other partnerships that make them stronger than a larger market cap company. Generally speaking, if an industry is dominated by a few large firms as opposed to a large number of smaller firms, the company will be in a better position to increase prices to compensate for raising cost.

So that's why to truly find a sizable company, you have to read up on the qualitative and that's where the tedious part comes in. Huge capital expenditures required in some industries require businesses to spend huge amount of capital even before they start making a profit. And this can give rise to a naturally occurring moat that prevents other competitors from coming in so easily. industries like retail trade, construction and technical services have low barriers to entry as compared to industries like transportation. Power, telecommunication and real estate development. If your dividend company is competing any low capital required industry and if not protected by other forms of moat like intellectual property rights, then be mindful that their business model can be easily duplicated by others.

Thus, when analyzing your dividend company have a good understanding of the industry it is in and the number of firms they are competing with. A business and a high barrier to entry industry probably have two to three major competitors valuable intellectual property, intellectual property strengthen a company's economic moat. Think of them as weapons to protect a company's profits. IPS rights can come in various forms. A powerful brand is the most easily described type. When a company has a powerful brand they've have so painstakingly built up throughout the years they can Sell to consumers the same product as their competitors, but at a higher price at a higher margin, especially if it's an expensive purchase.

Take the CFA exam online prep providers for example, we know the CFA exam requires a lot of commitment program exam candidate beat in terms of time and money. Therefore, it would be unthinkable or outright appalling to a candidate if he or her spent over 300 hours studying materials that are not relevant to the exam. Hence, online providers like Kaplan Wiley and Fitch learning has been providing quality exam preparation materials for so many years, making it very difficult for a new CFA exam provider to sell their services, even though the ladder might have similar materials provided. Another type of intellectual property is a patent with a patent, a company figures out how to do something valuable and then legally blocked. competitors from doing the same thing for a period of time. This could be for a blockbuster drug or an electronic design or almost anything.

Companies with unrivaled economies of scale can often form a constant patent shield by layering new patents after New patents and generating cash flows from a series of patented products. Here are some thinking points to consider about IP assets. Some extra points to take note, if your dividend company is making most of its money from China as an example, perhaps having lots of IP assets would not support a company's mode as much. This is because China is a country where IP law enforcement is relatively weak and copycats are rather rampant. Okay, now for high switching costs. With some products and services.

It's easy to switch To a competitor. If one day you decide you don't fancy like a certain clothing brand, you could just walk to another store and look for a similar brand. It's that easy. But it's much more of a hassle to take all of your assets out of a bank and transfer them to a new bank. Doing so would require you to update information with various entities like your insurance, your taxes, reestablish all sorts of payment links, telecom bills and utility bills. Most people wouldn't bother to do it unless their original bank really did something wrong.

Hence the term called switching costs. switching costs that are high will hook onto customers and not let them go so easy, not without a huge cost to them. consumers that are hooked are going to continue to consume that same product for the many years to come. And that is one of the economic moat we want to see if your dividend company is selling a product or providing a service. High switching costs result in sticky costs. customer's recurring revenue streams and the ability to raise prices to a reasonable extent without causing customers to leave.

Just like Intuit Inc, a company that offers its customers various bookkeeping software solutions. Because learning to use intuitive applications take significant time, effort and training costs few users are willing to switch away from into it. other modes in which companies can build for themselves are a becoming the lowest cost producer of a particular product while offering quality that is similar to the quality provided by competitors. Think of companies like Walmart, Costco, and be offering a unique product or service that adds so much value for customers that they are willing to pay a premium for it. Think of the baby products offered by Johnson and Johnson. Companies can establish their comparative advantage and hence their money.

In a particular target segment of the industry based on being cost focused or simply bringing or offering differentiated products and services, and so, we have reached the summary for this lecture. These are the lessons we have gone through. Again, all the summary points can be found in the attached Enjoy the summary