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How to Find and Screen for Great Dividend Stocks

Fajasy
Updated: February 26, 2021
Reading Time: 8 minutes

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In this article, I will show you how to find and screen for great dividend stocks. Afterwards, you can research these stocks further and determine an appropriate buy price range to invest in. At the very least, this article should uncover the many great dividend players and resources you may be missing, which can provide ample buying opportunity.

Dividend Aristocrat List

The dividend aristocrats list consists of S&P 500 dividend-paying companies, among certain size and liquidity requirements, that have consistently increased their dividend for 25 consecutive years or more.

The S&P 500 Dividend Aristocrats ETF (NOBL) consists of all 65 dividend aristocrat companies and is compared to an S&P 500 Index ETF (SPY) below:

See all current dividend aristocrats at Dividend.com.

Although past performance is not a measure of the future, it's likely that many of the stocks in the dividend aristocrats list will continue to grow their dividend over the next few decades, if not longer.

It's safe to say that all of these companies have some kind of economic moat, stable earnings, solid fundamentals, and strong financial performance. Particularly for beginners, these are the dividend players I would look at first.

Besides purchasing at a good price, if you decide to invest in a dividend aristocrat, then ensure their dividend payout ratio is not too high ( <75% roughly), else your future dividends may not have much room to grow.

Dow Jones Industrial Average (DJIA) 30 Stocks

The Dow Jones Industrial Average (DJIA) is one of the most commonly followed equity indices, and is considered a proxy for general market conditions in the U.S. It consists of 30 blue-chip companies that span nearly every major industry in the U.S. stock market market.

The DJIA Index (DJI) is compared to an S&P 500 Index ETF (SPY) below:

See all current dividend-paying companies in the DJIA at Dividend.com.

As of writing, 28 out of the 30 stocks in the DJIA index are dividend stocks, which makes it a great place to begin, especially for new dividend investors. Investors can also look at DJIA stocks during periods of economic uncertainty, where they are more likely to be replaced by others.

One thing to note here, is that there may be some companies in the DJIA that are also in the Dividend Aristocrats list.

Media Sources, Websites, and Newspapers

Various media sources, websites, and newspapers discussing dividend stocks can uncover a lot of potential dividend investment opportunities. The important thing here is to do your own research and to ignore most of the noise that comes when stocks are discussed.

Below is a short list of some resources I have found to be useful:

  • Yahoo Finance: If you search for a dividend stock, you will see a section called "People Also Watch" under the "Summary" tab which typically includes other dividend stocks.
  • Seeking Alpha: Dividend investors write a lot of articles here on different dividend stocks.
  • YouTube videos and blogs: This can uncover a lot of "hot" dividend stocks that may be worth looking into further. On StableBread itself, many dividend stocks have been discussed in the Dividend Investing Category.
  • Dividend forums: Dividend Growth Forum, Reddit, and other dividend or value-oriented forums discuss dividend stocks as well.
  • Dividend newsletters: Free dividend-focused newsletters from Dividend.com and Dividend Monk can be useful to receive new dividend stock ideas.

There are many other ways or resources to find dividend stocks, but the list above should help you get started.

Dividend Stock Screeners

There are thousands of dividend stocks in the stock market, most of which are not worth your investment. Instead of going through all of these stocks, you can use free dividend stock screeners to input various criteria and determine the best dividend stocks which are stable and can continue to grow their dividend over the long-term.

Below is a list of the best free dividend stock screeners I have found:

The "best" stock screener depends on your preferences as an investor. What's important is that you're using a screening tool with enough dynamic criteria, which the stock screeners in the list above provide. I will discuss the parameters and ranges I select when screening for dividend stocks shortly, which can vary depending on your risk tolerance and required rate of return. Obviously, the more parameters you select in a stock screener, the less companies you will get, so keep this in mind.

Dividend Stock Screening Parameters

After applying the stock screen parameters discussed below and adjusting the ranges to meet your investment criteria, you should end up with a short list of potentially great dividend investments. If this list is still too big for your liking, then adjust the ranges and/or add in a profitability measure like EPS growth, sales growth, or net profit margin.

You can then quickly scan the list and cross out any dividend stocks your portfolio has too much industry exposure in, or cross out those that are not within your circle of competence whatsoever. Finally, you can research the ones that you believe could be worth looking into further.

Market Capitalization

Market capitalization or "market cap," is the total dollar market value of a company. This depends on a company's stock price and the number of outstanding shares a company has, as the formula below shows:

Market cap = Stock price x Shares outstanding

If you're investing in a company for its dividends, you'll want to invest in larger companies that are profitable, more stable, and are much more likely to be sustainable over the long-term. Therefore, I'd stick with companies with a market cap over $1 Bil. (aka $1000 mil) to ensure they're a more mature company with strong and predictable cash flows.

Return on Equity (ROE)

Return on equity (ROE) is a measure of how effectively management is using its equity to generate profits. A higher ROE is better as it suggests a company is more efficient at using its equity capital to generate profit.

ROE = Net Income / Shareholders' Equity

The average ROE of the S&P 500 is 14%, so you can set your stock screener to be higher than this, or as low as 10%. You can also go by the industry average ROE as well, depending on what dividend companies you're looking to invest in.

Debt-to-Equity (D/E) Ratio

The debt-to-equity (D/E) ratio is measure of the proportion of equity and debt used to finance a company's assets. With this liquidity ratio, a higher ratio indicates the company is more levered, which typically means more risk. Therefore, dividend investors should pick stocks with a low debt-to-equity ratio to protect their dividend over the long-term.

D/E ratio = Total debt / Total shareholders' equity

The D/E ratio average can vary by industry, but in general, keep the ratio as low as possible in your screener (i.e. lowest 20% in the industry).

You should add a debt measure like the D/E ratio because ROE can be higher if a company has more liabilities, which means a smaller shareholders' equity figure, thus resulting in a higher ROE if earnings do not change. Moreover, management can be compensated for higher ROE figures. Obviously, you wouldn't want to invest in a company where the management team selfishly prioritizes taking on more debt to drive higher ROE, instead of actually trying to improve the fundamentals of the business for its shareholders.

Dividend Yield

The dividend yield is the ratio of a company's annual dividend compared to its current share price. I prefer a starting dividend yield of 3-5%, although it can go as low as 2-2.5% depending on the company.

Dividend yield = Annual dividend / Current stock price

This screen will eliminate any non-dividend-paying companies, small dividend players, and also those with a dividend yield trap, which is when companies offer a high but typically unsustainable dividend yield that can subsequently lead to dividend cuts and lower stock prices.

Dividend Coverage Ratio or Dividend Payout Ratio

The dividend coverage ratio shows how many times a company can pay dividends to its shareholders. In general, if the ratio is above 1.5, then the company has a safe dividend. So, if the screener you're using has a dividend coverage ratio option, you can set it to be 1.5 or greater.

Dividend coverage ratio = Earnings per share (EPS) / Annual dividend

The dividend payout ratio looks at how much dividends a company pays and compares it to how much profit a company has. The dividend payout ratio is the complete opposite of the dividend coverage ratio, and is more commonly found in stock screener parameters.

Dividend payout ratio = Dividends per share / Earnings per share

A higher dividend payout ratio could mean slower growth for the company and for your dividend, while a lower payout ratio simply means you're not getting enough reward for the money you're investing. Therefore, I would stick with a dividend payout ratio below 70% in your stock screener, if not lower. A 70% dividend payout ratio means that for every $100 in profit the company generates, they could pay out $70 in dividends.

If you have a longer time invest horizon, then it may be wise to stick with a dividend payout ratio below 50% instead. Moreover, if you're looking to invest in a particular industry, then you can also reference the industry average dividend payout ratio.

Dividend Growth Rate

The dividend growth rate is the rate at which a dividend-paying company grows its dividend. A company can have a strong dividend yield, but the rate at which its dividend grows annually is more important, as it can significantly contribute to the double compound effect. In short, what this means is that you will receive more in dividends over the long-term from strong stock price and dividend growth, than from a slow or stagnant dividend.

Dividend growth rate = (Present dividend - Past dividend) / Past dividend

In stock screeners, this parameter is often shown as the "5-yr dividend growth rate." I like to keep this at 6% minimum. Any higher tends to eliminate some great dividend players like Johnson & Johnson (JNJ).

The Bottom Line

In summary, begin by researching dividend stocks in the Dividend Aristocrats List and dividend stocks in the DJIA. Afterwards, you can look into various media sources, websites, and newspapers to uncover even more great dividend investment options. Just ensure that you're not over-diversifying your investments, and that you're buying the right dividend companies at the right price.

Stock screeners are also useful to quickly screen for dividend companies that are within your investment criteria, which can speed up the investment research process significantly. To recap, the primary parameters I consider are the market cap, ROE, D/E ratio, dividend yield, dividend coverage/payout ratio, dividend growth rate, and any profitability measure like EPS growth to further narrow down the list. After you have a solid filtered list of dividend stocks, you would just research and invest in those that are at an attractive price and dividend yield.

Disclaimer: Because the information presented here is based on my own personal opinion, knowledge, and experience, it should not be considered professional finance investment or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional.
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