Screening for Dividend Paying Stocks
30 May 2007The first order of business is to screen for high quality dividend paying stocks. This is an endeavour that I have tried before over at Investment Jungle.
There are two basic ways to screen for dividend paying stocks:
1 Develop your own Stock Screen
Stock screens are used to filter the universe of stocks (there are over 10,000!) to a manageable number. By filtering these lists, you will be guaranteeing yourself that the stocks that made it through the filter will exhibit the characteristics that you are looking for (assuming that you set your filter up properly). In my original post, I came up with the following characteristics:
Characteristics of a Quality Dividend Paying Stock:
1. Determine the historical dividend growth rate. You would like to see a long history of increasing dividends.
2. Strong cash flow growth rate. It takes cash to pay out dividends. Finding a company with a solid cash flow growth rate may help predict a company that will be able to raise its dividend payments in the future.
3. Dividend Coverage Ratio. This ratio is the trailing 12 month operating cash flow per share divided by the current annual dividend.
If the dividend coverage ratio is less than 1.0, then the dividend is in jeopardy. You want to see this number above 1.0 and the higher the better.
4. Dividend Payout Ratio. You want to ensure that the company is not spending all its available cash to pay out the dividend.
Other factors to consider:
Another factor to look at is to consider how the dividend yield compares to its current index. For example, the S&P 500 Index currently has a dividend yield of 1.89%. The Dow Jones 30 Index has a dividend yield of 2.26%. The S&P/TSX Composite Index has a dividend yield of 2.35%. I would think that you would want a stock to have a dividend yield greater than its current index. Otherwise, why not just invest in the index for the greater dividend yield?
Another factor to look at is the stock’s average dividend yield. Historically, the stock has bounced between a high dividend yield and a low dividend yield. At the high dividend yield, investor’s have shown themselves to be motivated to purchase the stock since they have not allowed the dividend yield to climb any higher. Similarly, investor’s are not willing to push the low dividend yield past a certain point. The dividend yield will operate within this boundary.
2 The Easy Way
The easy way is quite easy. You see, there already exists pre-made lists for our use.
Mergent’s Dividend Achievers offers a great list of dividend paying stocks. The basic criteria for being considered a “dividend achiever” is for a company to have increased its annual regular dividend payments for the last 10 or more consecutive years. Obviously this shows the company’s dedication to growing the dividend for their shareholders.
S&P 500 Dividend Aristocrats offers an even more exclusive list of high quality dividend paying stocks. To join this list, companies have had to follow a policy of consistently increasing dividends every year for at least 25 consecutive years. Yes, you heard that right. For 25 consecutive years!
The Way Forward
Although I fully intend to develop my own screening criteria in the near future, I will begin by analyzing these highly regarded dividend growing companies.
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