I believe investing in dividend growth stocks is one of the best way to make your money work for you, as 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 am using a set of filters to decide on which stocks to invest in when comes the time to inject fresh cash in my portfolio. In this article, we are going to focus on how to select the best stocks for dividend growth investing. I will give you all the set of filters I use for my own investments, which qualitative values I am looking at, and finally all the tools & resources that you can use for your investments.
The first thing that I am focusing on is of course the dividends that the company is paying. There are three things that I like to look at: the current yield of the stock, and the dividend history of the company. About the yield, which is the total return of the stock for a given year divided by the value of the stock, I like to shoot for yields that are above 3%. I usually don’t invest in companies that have yields above 6%, as it is unsustainable for a company to pay & grow such a dividend.
But the yield is far from being the most important thing to look at for a dividend stock investment. When I first started to invest in dividend stocks, I completely missed out on the dividend history, and focused only the yield only. The result was companies that reduced or cut their dividends after a while, or ETFs (Exchanged Traded Funds) 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 indicates that the future of this company will be bright, but it’s a good point to start with.
Then, I look at the growth rate of the dividend payouts. I usually look at the 5 years dividend growth, and aim for a growth of at least 5% over this period.
The second thing I look at is the current valuation of the stock. 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 crash because investors are panicking following some news that are unrelated to the company I am buying.
I also look at the P/E (Price/Earnings) ratio, which is obtained by dividing the current price of the stock by the earnings/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.
When I select a stock that looks attractive in terms of dividend history, I then usually wait so that the valuation of the stock goes under a given value so that it’s also attractive in terms of yield & P/E ratio.
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, that have been founded in the previous century, have diversified activities, and are present worldwide. This is for example the case for General Electric or for United Technologies Corporation.
I also like to invest in sectors where the demand is always growing, like the healthcare sector, or telecommunications.
Tools to Help You Out
Once you have your set of filters for your dividend growth investing strategy, I recommend that you start searching on the web for the best dividend paying companies out there, and start adding them to your portfolio.
I also created a tool called DividendStocks.io to help you out with your dividend stocks selection. It lists an up-to-date list of the best dividend stocks, that you can sort according to your criteria.
What do you look at when selecting a dividend growth stock? Don’t hesitate to share below!