How to Select the Best Dividend Growth Stocks
My systematic approach to building a dividend portfolio
I believe investing in dividend growth stocks is one of the best ways to make your money work for you. It allows you to create purely passive streams of income that will grow over time. However, the most important part in dividend growth investing is to carefully choose the dividend-paying stocks you put in your portfolio.
Because of my scientific background, I love to focus on numbers when selecting my dividend growth investments. I use a set of filters to decide which stocks to invest in when it comes time to inject fresh cash into my portfolio.
In this article, we're going to focus on how to select the best stocks for dividend growth investing. I'll share all the filters I use for my own investments, which qualitative values I look at, and the tools and resources you can use for your own research.
This systematic approach has helped me build a portfolio of reliable dividend payers that generate consistent passive income month after month. While no system is perfect, having clear criteria removes emotion from investing and keeps you focused on quality companies.
Dividend History
Current Yield: The 3-6% Sweet Spot
The yield is the total return of the stock for a given year divided by the value of the stock. I like to target yields that are above 3% to ensure meaningful income from my investments.
However, I usually don't invest in companies with yields above 6%. Very high yields often signal that the market expects the dividend to be cut, or that the company is in financial trouble. A 6%+ yield is often unsustainable for a company to pay and grow over time.
Dividend Growth History: The Real Key
But the yield is far from being the most important thing to look at for a dividend stock investment. When I first started investing in dividend stocks, I completely missed out on the dividend history and focused only on yield. The result? Companies that reduced or cut their dividends after a while, or ETFs that didn't grow their dividends over time.
I first look at the number of years that the company has been growing dividends. Some companies, like Johnson & Johnson, have an excellent history of more than 50 years of growing dividends. Past performance never guarantees the future, but it's a strong starting point.
Companies with 25+ consecutive years of dividend growth are called "Dividend Aristocrats"— these are often the most reliable dividend payers.
Dividend Growth Rate
Beyond just paying dividends consistently, I want companies that are growing their dividends. I usually look at the 5-year dividend growth rate and aim for a growth of at least 5% over this period.
This growth rate matters because it helps your income keep pace with (or beat) inflation. A stock yielding 3% today that grows dividends at 7% annually will yield much more on your original investment in 10 years than a stock yielding 5% with no growth.
Valuation
Buying at the Right Price
I first look at the value of the stock I want to purchase to make sure I buy it at the best price possible. I especially like to take opportunities when the stock market crashes because investors are panicking following news that's unrelated to the company I'm buying.
Market-wide sell-offs often drag down quality companies along with everything else. These moments of fear create excellent buying opportunities for long-term dividend investors.
The P/E Ratio Filter
I also look at the P/E (Price/Earnings) ratio, which is obtained by dividing the current price of the stock by the earnings per share of the company. It gives a basic indicator about the current value of the company and tells you if the company is undervalued or overvalued.
I usually aim for P/E ratios of 20 or less. Higher P/E ratios mean you're paying more for each dollar of earnings, which reduces your margin of safety.
Patience Pays Off
When I find a stock that looks attractive in terms of dividend history, I often wait until the valuation becomes attractive as well. This means waiting for the stock price to drop to a level where both the yield and P/E ratio make sense. This patience has saved me from buying at market tops many times.
Qualitative Values
Boring is Beautiful
At the end, I also look at qualitative values of the company—but only after the numbers make sense for me. I like to invest in "boring" companies: those that have been founded in the previous century, have diversified activities, and are present worldwide.
Think General Electric, Johnson & Johnson, or Procter & Gamble. These companies aren't exciting—they make toothpaste, bandages, and light bulbs. But that's exactly the point. Boring, essential products that people buy regardless of economic conditions.
Defensive Sectors
I also like to invest in sectors where the demand is always growing, regardless of economic cycles. My favorite sectors include:
Example Dividend Aristocrats
Here are some examples of companies that have paid and grown dividends for decades. These aren't recommendations—always do your own research.
My Complete Filter Checklist
Dividend History
Valuation
Qualitative
Tools to Help You Out
Once you have your set of filters for your dividend growth investing strategy, I recommend that you start searching for the best dividend-paying companies and begin adding them to your portfolio systematically.
There are many free resources available to screen for dividend stocks. Most brokerages offer stock screeners where you can filter by yield, P/E ratio, and dividend growth history. Websites like Seeking Alpha, Simply Safe Dividends, and Yahoo Finance also provide excellent research tools.
Start Small and Learn
If you're new to dividend investing, start with a small position in one or two well-established dividend aristocrats. This lets you experience the quarterly dividend payments firsthand and learn how the strategy feels before committing more capital. There's nothing like seeing that first dividend hit your account to understand why this strategy is so powerful.
Final Thoughts
Dividend growth investing is a marathon, not a sprint. By using systematic filters for yield, dividend history, valuation, and qualitative factors, you can build a portfolio of quality companies that will pay you increasing income for decades to come.
The key is patience and discipline—stick to your criteria, buy when valuations are attractive, and let compounding do the heavy lifting over time.