Best Dividend Stocks

When it comes to finding the best dividend stocks, you’ll probably want to use an automated stock dividend screener as a tool to find good candidates to buy.  Screening is a way to scan the stock market for stocks that meet your particular criteria.  Dividend investing can be very profitable, and while there are many stock screening programs out there (some you pay for, some are free – I’ll list a couple of free ones at the end of this article), it is important to understand the characteristics of good dividend stocks, so your screening tool can help you filter out unacceptable choices.

For an easy dividend stock screener to find the best dividend stocks, I would suggest focusing on the following qualities to help find strong dividend stock candidates:

Dividend Yield – The dividend yield can be calculated primarily in one of two ways – either by using the trailing 12 months dividends, or by using the expected dividends for the upcoming 12 months, and then dividing that number by the current price of the stock.  Ideally you want to buy dividend stocks that have a yield that is higher than the overall market.  Stock market yields as well as individual stocks yields will fluctuate over time, as stock prices move up and down, and the amount companies pay out in dividends changes, so it is good to check these factors right before you buy a stock, and not just rely on data you put together at some earlier point in time. At this time, I would suggest looking for stocks with dividend yields of at least 4% to 5%.

Profit – Also known as earnings, profit drives company growth, and more importantly for us, profit is what pays dividends in healthy stocks that pay dividends (some company’s pay for dividends by taking on more debt, and distributing that cash to share holders – see the next paragraph for more on debt).  While there are many ways to measure profitability, one widely used indicator that can be found on most stock screens is return on equity (ROE).  For ROE, the higher the better.  The minimum ROE we want is in the 10% to 12% range.  Another great indicator for profitability that is available on many stock screeners is earnings per share (EPS) – again, the higher the better for this indicator too.

Debt – Many of the best dividend stocks are from companies that are large, mature, and have accumulated long term debt during the process of growing into their current state.  The problem with debt is that too much of it can represent a risk to future dividend payments if the company goes into a rough patch, and earnings drop to the point where they may need the money they normally pay out as dividends to service their debt payments.  One easy way to measure debt is to look at the debt to equity ratio.  For our purposes, we would like to see the company financed with more equity than debt, which means that our dividend stock screener would need to limit the debt to equity ratio to less than .5, and ideally, you should look for stocks with a ratio even lower than that.

Market Cap – Also known as the market capitalization of a company, is a good way to filter the size of the company you are looking for.  Market cap is just the total number of shares outstanding, multiplied by the current price of the stock.  Most analysts use this as the measure of a company’s size.  For our dividend investing purposes, we want strong stable companies, and bigger companies are generally safer than smaller ones, so for market cap, select stocks that are at least $2 Billion. 

Valuation – This is how much the market is paying for a company’s earnings stream.  For this, we actually want a low valuation, because that usually means that a company’s stock price has been beaten down relative to it’s earnings.  The price to earnings ratio (P/E) is a widely available indicator that can help you assess valuation on a free dividend stock screener.

A couple of free dividend stock screeners that you can try to help you find the best dividend stocks are at MSN.COM and FINVIZ.COM.

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Stocks That Pay Dividends

Stocks that pay dividends can be a good alternative for investors either seeking regular income from their investment portfolio, or more consistent returns from their stock investments.  An investment in stocks that produce consistent dividends can be an ongoing source of profits for your portfolio.  These are some of the characteristics that these income producing investments provide:

1. Stocks that pay dividends can represent a single company, or they can be many companies under the organizational structure of a holding company, trust, closed end mutual fund, ETF, etc.  It is important to note that a majority of companies do not qualify for dividend investing for the simple reason that they do not pay dividends.
2. Companies that pay dividends do so because their management teams and boards of directors make a conscious, regular, and most importantly – discretionary – decision to pay their shareholders a dividend.  While most companies do this quarterly, there are many stocks that pay monthly dividends.
3. Dividend stocks typically have policies in place that promote the ongoing payment of dividends.  So while the decision to pay a dividend is at the discretion of the management team and board of directors, they typically have a goal of managing the company in a way that preserves, protects, and in many cases, grows the dividend income streams for their shareholders over time.
4. In many cases, stocks that pay dividends represent companies that are large, and more established (i.e. they have been around for a while).  These companies have created consistent, stable cash flows with very predictable earnings.  For example, utilities are a great type of stock that pays a dividend, they have a steady, predictable, source of income, expenses that are understood (and that can usually be passed along to their customers if expenses go up unexpectedly), which leads to a stable source of profits to pay dividends with.
5. Stocks in general are volatile, but stocks that pay dividends are usually lower in volatility than the overall stock market.  This is because investors are confident enough in the earnings of these companies, and the income they produce on a regular basis for their shareholders, that they reward this stability with lower price volatility, due to the justified view that these stocks are safer than average.
6. There are also tax advantages to owning dividend paying stocks.  Capital gains only trigger a taxable event when these stocks are sold, just like regular stocks.  The key tax advantage is that right now, the maximum federal income tax rate for dividends is only 15%.  This tax rate is lower than the tax rate you pay on bond interest, which is usually taxed at the same rate as your salary.  15% is typically much lower than your marginal tax rate for other sources of income.

As you can see, stocks that pay dividends have characteristics that set them apart from the overall stock market.  These income producing stocks may have a place in your investment portfolio.

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Highest Dividend Stocks

Income investors looking for a good return on their investment often look for the highest dividend stocks, or more precisely, the highest yielding dividend stocks.  This can also be a good place for value investors to look for potential buy candidates because high dividend yields can be caused by a stock price being temporarily low (i.e. undervalued stocks), which simultaneously raises the yield.  However, the highest dividend stocks can also be a dangerous place to find buy candidates.

Normally when income investors are looking for dividends stocks, they are looking at monthly dividend stocks or stocks that pay dividends quarterly with the highest yield (adjusted for risk).  The issue with the highest dividend stocks on the top dividend stock list is that they are usually amongst the most risky stocks a conservative income investor will look at.  Many of these stocks have high dividend yields because the underlying stock price has fallen, while the dividend payment is presumably staying the same, giving the appearance of a high yield.  Stocks with high dividends should raise a flag with any income investor to be extra diligent doing their homework.  The biggest question you’ll need to ask yourself is whether or not the dividend is safe?

The first thing an income investor should screen for in stocks paying dividends is whether or not the stock is consistently profitable.  As they say on Wall Street, profits drive dividends, and many times, stocks with high dividends are also losing money – their dividends place them on the highest dividend stocks list because of the additional risk.

Another attribute that you should look for in profitable top dividend stocks is how well their earnings cover their dividends – also known as the dividend payout ratio.  Ideally, you want to see a stock paying out less than 50% of it’s earnings as dividends.  If the high dividend stocks you are looking at have a dividend payout ratio of 50% or less, the dividend has a higher probability of being safe – in other words it is less likely to be reduced or cancelled.

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Monthly Dividend Stocks

Monthly dividend stocks can be a good idea for income investors to create a steady income stream.  If you are looking for regular income, you may want to consider monthly dividend stocks.  Thats right, there are stocks that pay monthly dividends.  These monthly dividend stocks are just like their quarterly dividend stock brethren, but they pay out their dividends – you guessed it – on a monthly basis.

Many people interested in income investing have stocks that pay quarterly dividends in their portfolio, as these are the most common type of dividend paying stocks.  Depending on the dividend payment dates, this can lead to inconsistent monthly income – for example you get a lot of dividend income in the first month of the quarter, and very little dividend income in the last month of the quarter.  One way to smooth this out is to buy stocks that issue dividends in different months of the quarter.  Another way to set up a more steady income stream is to put monthly dividend stocks in your portfolio.

Most stocks that pay monthly dividends are investment trusts, closed end funds,  or holding companies that own many income producing securities, that issue the income from these investments in the form of  a monthly dividend.  The list of monthly dividend stocks is nearly 300 long.

Adding stocks with a monthly dividend payment can help smooth out the monthly income in your portfolio.  Click on the link above for a list of monthly dividend stocks.

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