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Friday, January 26, 2018

How to Pick Dividend Stocks

dividend growth investing
I wanted to briefly share how I pick the dividend stocks that I have in my portfolio. Now, not all of the ones I have in my portfolio followed this exact method. Some stocks I bought because I just wanted to own a piece of the company and I have some non-dividend growth stocks as well that I bought for growth reasons. Following the steps below have helped me in picking high quality dividend growth stocks.

1. I created a watchlist on google finance/yahoo finance that I could easily track each day. 
This list contains over 125 stocks and I can easily look at the fundamentals such as P/E, EPS, Dividend Rate, Dividend Yield, etc. 
If you'd like to see this watchlist I created just let me know. 

2. I tend to look for large cap companies with a business model that I can understand.  
If you don't understand how a company makes money then you shouldn't invest in their stock. This will soften the blow if the company isn't doing well. A lot of people blindly throw money into stocks because they got a tip online or from someone they know. Invest in something you can understand and it will make it easier to own the stock. Also, if you can see people using the products/services every day then that will help as well. One reason I like Apple (AAPL) is because everyone I know has an iPhone.

3. I tend to look for companies with a P/E under 20.  
P/E is the price to earnings ratio of a company and it is used to value companies. The higher the P/E usually means it is a higher growth company or the company is overvalued. A lower P/E could mean the company is undervalued or it's a much lower growth company. I'm not necessarily looking for a high growth company, but rather a solid dividend growth company. I'd rather a lower growth company that can continue to pay and increase dividends year over year. 

4. Dividend yield over 2%
The lower the yield usually means it is a higher growth company and its possible I will invest in a company with a yield lower than 2% but I will need to see a solid history of dividend growth to support that. Otherwise I'd rather have the higher yields at this point. I usually look for companies in the 2.5% - 4% yield area with a few outliers. If you see a stock with a very high yield you have to be careful. It's possible that the dividend is unsustainable and will be cut soon. It's usually a sign that the company is not doing well either. 

5. History of dividend growth and earnings growth
I will always look at their recent and long term dividend and earnings growth. A company that has continually raised dividends and earnings is likely to do so in the future. I like to see dividend growth of at least 5% per year, but I will take a lower growth rate if the company is paying a higher dividend. A good example of this is Verizon (VZ) and AT&T (T)

A strong earnings growth is also desired because this means that the dividend growth will likely be supported. 

You can find a list of companies that have consistently raised their dividends at http://dailytradealert.com/dividend-champions-contenders-and-challengers/

6. Dividend Payout ratio of less than 60% 
The payout ratio is the dividend per year/earnings per share. A lower ratio means the company should have no trouble paying a dividend and increasing the dividend in subsequent years. A higher ratio means the company may have lower growth or be forced to cut the dividend. Be careful of any stocks that the ratio is at, near, or over 100%

An example of this is Apple (AAPL)
The dividend per year is 2.52 and their earnings per share is 9.19
2.52/9.19 = 27%

While their dividend yield is lower than 2% they have a lot of room to increase it in the upcoming years. I think they will end up being one of the great dividend stocks.  

7. Research the company
Do your own due diligence and research the company. Read up on the latest articles/product releases/product reviews. What is the company doing lately? You can easily check their website for recent news and updates. My broker also provides a lot of detailed reports on the companies which can be very helpful in deciding if I want to invest or not. 

8. Diversify
This is true with any investments you make. You want to build a dividend stock portfolio that is well diversified across all the industries. This will minimize the risk of the portfolio. Its possible one industry today may not exist tomorrow and you don't want to have all your eggs in one basket. 

9. Have patience with your purchase
As with any stock purchases you should always have patience. I am a buy and hold investor for the long term. I don't care about the price of the stock today or tomorrow. I want to see the company grow their earnings and dividends for the long term.

Let me know what you guys think! What other things do you look for when you invest?

Image courtesy of worradmu at FreeDigitalPhotos.net 

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