I have been watching the stock market for nearly 30 years and dividend stocks are one of my favorite stocks. They don’t give you crazy returns, but they pay you passive income. Ideally, you could acquire enough of them so that you could live solely on dividends.
The common question I get from investors is “how to find dividend stocks.” The short answer is that there are dividend stocks all around you. Warren Buffett uses often looks at products and then invests in the companies. An example of one of his best dividend stock picks is in consumer goods like Coca-Cola Company (NYSE: KO). However, for many investors, this question can seem like a difficult one to navigate. In fact, I have found that for some people, not knowing where to invest keeps them from investing at all.
The good news is that there are many free tools available to scan for stocks/ETFs and most likely your brokerage firm has stock screening available for you. The objective of this lesson is to give you an overview of what to look for in dividend stocks and a simple list to get started. We will cover three ways to find dividend stocks.
Here are three ways to get started:
- A pre-screened List of Dividend Stocks from ABS Market Advisor
- The Dividend Aristocrats
- Your Own Search: A Basic Process to Find Dividend Stocks
I would like to remind you that as a subscriber of this course, you will be receiving 1 free month of Advisor Market Intelligence that comes with our featured dividend stock picks. If you upgraded, you will be receiving those stock picks longer.
Before I continue, I should warn you against picking a stock solely because it pays a large dividend. The reason for this is that many of these types of dividend stocks are real estate investment trusts (REITs). They can be very risky and often depreciate. You have probably heard the saying that if it is too good to be true, it probably is. Well, let us apply that here. If a stock sounds too good, then it most likely is.
Regular dividend-paying stocks are preferred by many investors. The strategy is a tried-and-trusted one for wealth accumulation, as it provides a regular income and better protection against inflation than might be provided by bonds.
But how does one identify such stocks? There are no certainties in the future. That said, there are certain key factors found to be common amongst such companies. Let us go there now.
Option 1 – Pre-screened List of Dividend stocks
Every week we publish the ABS Market Intelligence Report that contains a list of featured dividend stocks you can use to inform your research and investment decisions. In addition to this weekly list of featured dividend stocks, the ABS Market Intelligence Report also provides professional market analysis to help advisors and investors navigate the markets.
Our report simplifies what is going on in the market and delivers the intel to you every week. It is used by many who want to save time and get on to finding and investing in new stocks. Beyond saving you time, using the pre-screened list from ABS Market Advisor’s weekly report can help you out-perform in your investment journey.
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Option 2 The Dividend Aristocrats
A second way to get started with selecting dividend stocks is to use a list of dividend aristocrats. Most investors are aware that dividend stocks are stocks that pay money to their stock owners, but not everyone knows that there are “Dividend Aristocrats.”
So, what is a Dividend Aristocrat?
The short answer is that it is a company that has paid a dividend and has also increased its dividend for at least 25 years. Currently, there are 66 Dividend Aristocrat stocks. This is a great list for starting your search for dividend stocks.
|AOS||A.O. Smith Corp.||Industrials|
|AFL||Aflac Inc.||Financial Services|
|APD||Air Products & Chemicals Inc.||Basic Materials|
|ADM||Archer Daniels Midland Co.||Consumer Defensive|
|T||AT&T, Inc.||Communication Services|
|ADP||Automatic Data Processing Inc.||Industrials|
|BDX||Becton, Dickinson And Co.||Healthcare|
|BF.B||Brown-Forman Corp.||Consumer Defensive|
|CAH||Cardinal Health, Inc.||Healthcare|
|CB||Chubb Limited||Financial Services|
|CINF||Cincinnati Financial Corp.||Financial Services|
|CLX||Clorox Co.||Consumer Defensive|
|KO||Coca-Cola Co||Consumer Defensive|
|CL||Colgate-Palmolive Co.||Consumer Defensive|
|ED||Consolidated Edison, Inc.||Utilities|
|ECL||Ecolab, Inc.||Basic Materials|
|EMR||Emerson Electric Co.||Industrials|
|XOM||Exxon Mobil Corp.||Energy|
|FRT||Federal Realty Investment Trust||Real Estate|
|BEN||Franklin Resources, Inc.||Financial Services|
|GD||General Dynamics Corp.||Industrials|
|GPC||Genuine Parts Co.||Consumer Cyclical|
|HRL||Hormel Foods Corp.||Consumer Defensive|
|IBM||International Business Machines Corp.||Technology|
|ITW||Illinois Tool Works, Inc.||Industrials|
|JNJ||Johnson & Johnson||Healthcare|
|KMB||Kimberly-Clark Corp.||Consumer Defensive|
|LEG||Leggett & Platt, Inc.||Consumer Cyclical|
|LIN||Linde Plc||Basic Materials|
|LOW||Lowe`s Cos., Inc.||Consumer Cyclical|
|MKC||McCormick & Co., Inc.||Consumer Defensive|
|MCD||McDonald`s Corp||Consumer Cyclical|
|NEE||NextEra Energy Inc||Utilities|
|NUE||Nucor Corp.||Basic Materials|
|PBCT||People`s United Financial Inc||Financial Services|
|PEP||PepsiCo Inc||Consumer Defensive|
|PPG||PPG Industries, Inc.||Basic Materials|
|PG||Procter & Gamble Co.||Consumer Defensive|
|ROP||Roper Technologies Inc||Industrials|
|SPGI||S&P Global Inc||Financial Services|
|SHW||Sherwin-Williams Co.||Basic Materials|
|SWK||Stanley Black & Decker Inc||Industrials|
|SYY||Sysco Corp.||Consumer Defensive|
|TROW||T. Rowe Price Group Inc.||Financial Services|
|TGT||Target Corp||Consumer Defensive|
|VFC||VF Corp.||Consumer Cyclical|
|GWW||W.W. Grainger Inc.||Industrials|
|WMT||Walmart Inc||Consumer Defensive|
|WBA||Walgreens Boots Alliance Inc||Healthcare|
|WST||West Pharmaceutical Services, Inc.||Healthcare|
|AMCR||Amcor Plc||Consumer Cyclical|
|ATO||Atmos Energy Corp.||Utilities|
|O||Realty Income Corp.||Real Estate|
|ESS||Essex Property Trust, Inc.||Real Estate|
|ALB||Albemarle Corp.||Basic Materials|
|EXPD||Expeditors International Of Washington, Inc.||Industrials|
Option 3 Your Own Search: A Basic Process to Find Dividend Stocks
Using your brokerage or online service, you can search through thousands of stocks. Obviously, there are millions of stock-picking strategies and your strategy is aligned to your unique goals.
I recommend using Finviz.com to aid you in finding stocks and/or performing basic analysis of stocks. They offer a free and paid version that is easy to use. Above is a screenshot from finviz.com using their basic stock filtering system.
Another great site for finding stocks is Tradingview.com. I love their chart options and provide basic trend views and technical indicators. They also offer a free and paid version.
Another great website is Stocktwits.com, which is a social website for traders that can give you a pulse on a stock.
There are millions of strategies and systems for picking stocks. However, I believe there are a couple of things that are worth considering when conducting your own search for a dividend stock.
There are many factors that investors consider before investing. Below are some of the key factors I think investors should consider:
1. Modest Earnings, Healthy Cash
Consistent profitability on an annual basis, and not an occasional spike in some quarters, should be a key consideration. For me, a long-term expectation of earnings growth between 5% and 15% on an annualized basis is a good range to the target. Go above 15% and you increase the risk of losing value in your stock.
Combine this with a consistent generation of cash, which is needed for the company to pay out dividends, and you have a company worth considering.
A five-year track record of consistent dividend payout is generally a good signal of dividend growth. It goes without saying that your purchase of these shares needs to be before the ex-dividend date (the cutoff date for shareholders to be paid dividends).
2- Sector Performance
Viewing the stock-issuing company’s performance is obviously of key importance but should be viewed in the perspective of the performance of the sector as well as the outlook.
As an example, if oil prices drop, demand will rise while supply will decrease, leading to the reduction in cash available to the oil company, which could impact dividend payouts.
The healthcare sector can, today, be considered resilient enough to weather occasional ups and downs, what with an aging baby boomer population powering the demand for healthcare services. Hence, it would be reasonable to expect dividend increases from the players in the sector, subject to individual company financials being in support as well.
We can take the soft drink industry as another example. Owing to increasing health-consciousness among consumers, these companies are trying to shift to healthier drinks and products. In many ways, it is like creating a new business, which is never easy. Dividend payouts, as a result, could face headwinds in the near future.
3- Debt in Control
For a company with debt on its balance sheet, prioritization of cash usage can be an issue. For example, paring down the debt might be preferred to paying out dividend payments. Hence, excessive debt is a no-go zone for dividend seekers. As a general rule, if the debt-equity ratio is above 2.0, I generally stay away.
4- Low Beta
Beta is the stock’s volatility in regard to the market. To maximize our income in this course, you will want low volatility stock. Take into consideration, then, the sector’s volatility.
The Coronavirus, for example, has caused extreme volatility for energy/oil stocks. Investors will need to take this into consideration when looking at the beta of energy stocks. Generally speaking, I look for stocks that have a beta below 1.5 for the last 3 years.
5- Price Per Earnings (P/E)
Price-to-earnings is a ratio, also known as P/E ratio, P/E, or PER. It is the ratio of a company’s share price to the company’s earnings per share. It is a basic measurement of the current share price relative to earnings per share. It is also used in the valuation process to determine if a company is overvalued or undervalued. The P/E is also sometimes referred to as the earnings multiple or the price multiple.
Taking into consideration the sector, I generally think a P/E 20 and below is good, 20-25 average and anything above I think is overpriced or maybe a signal of something being off with the company.
6- Chart Technicals
Technical stock analysis is the trading strategy used to evaluate investments and identify trading opportunities using charts and data-based primarily on price and volume. It is different from fundamental analysis in that it does not evaluate the actual company behind the stock.
An example of a technical indicator is a 200-day moving average, which gives a general direction of the stock. When a stock is above it, then it is considered “bullish”. When a stock is below it, it is considered “bearish”. Technical indicators are useful for analyzing stock trends and identifying long-term trends.
I consider a bullish trend when the stock is above the 200, 50, and 20-day moving averages. There are a zillion other indicators, but these are just a basic “mile high view” of the trend.
As a dividend-seeking investor, this is what you might consider in conducting your own search:
- The long-term earnings growth expectation of the company should be in the 5% to 15% range.
- The company business model should enable the company to generate adequate cash to support the payout of dividends.
- Historical evidence of payout, such as a 5-year plus track record of consistent dividend payouts.
- Company Debt, avoiding companies with a debt-equity ratio more than 2.0.
- Go beyond company financials and correlate with the performance and outlook for the sector as a whole.
- Consider indicators like beta (below 1.5) and P/E (below 20)to seek out high-quality and low volatility stocks.
- Look for medium to long-term bullish trends using technical indicators.