In this article, I will show you how to select undervalued dividend growth stocks. As you might know, dividend growth investing is one of my favourite way to invest my money because it's really a passive way of investing money but also has great returns, thanks to a constant growing of the dividends given by those companies.

The most important when you build a portfolio is to select the right stocks at the right time so in this article I really wanted to tell you all about really selecting the best and unvalued stocks of the moment. I will tell you what parameters I am looking at, how to actually find them and what tools to use.

What parameters to use to select undervalued stocks?

I look at those two indicators mainly. The first one is called the price over earnings ratio, or P/E ratio. That's basically the price of the stock divided by the earnings per share. So this tells us if it's high that the price of the stock is too high compared to the earnings of the company, and probably it is overvalued at the moment.

So what I use as a threshold is 20, so everything under 20 means that the stock is at a good price at the moment. 

In terms of dividend yield, again a high dividend yield means that you get a good  return on your investment. For that, I usually look at stocks with a yield of at least 4%.

How to find undervalued dividend growth stocks?

So you might ask, how to actually find those stocks right? Of course, you could just go sites like Yahoo Finance, type every possible company and just look at those two indicators. 

Well, I created a free tool called TrackInvest to really helps you to quickly screen through dividend growth stocks and find the ones that are undervalued at the moment. 

This is completely free, you can register for an account if you want to track your own portfolio and your own investments, but you can also use a feature called the Stocks Explorer that we'll use right now and for which you don't even need to register. 

In there, you can see what stocks are currently tracked by the application:

How to Select Undervalued Dividend Growth Stocks

What I'm going to put here is mainly the two variables that we discussed earlier. I want the P/E ratio to be under 20, and the dividend yield to be at least 4%. That already filtered out a lot of stocks:

How to Select Undervalued Dividend Growth Stocks

Those would be potential good stocks that we can add to our portfolio because they are currently undervalued.

Now, I like to mix those filters with something that I always put when I select dividend growth stocks. First, a payout ratio of under 80. The payout ratio is basically how much the company pays in dividend compared to what their profit is. So basically, how much they can actually sustain the dividend in the future. 

If it's over a hundred it means that they actually using their own cash to pay the dividend and that's not good at all that probably mean they will cut the dividend in the future and we don't want that. 

So let's try to put a payout ratio of under 80:

How to Select Undervalued Dividend Growth Stocks

You can see it removed a large amount of stocks. Finally, I will apply a little bit of dividend growth as a filter, let's say 10%:

How to Select Undervalued Dividend Growth Stocks

You can see that we have some good candidates in the list so far. Let's adjust the yield and put it to 3.5%, which is still enough for good dividend growth stocks:

How to Select Undervalued Dividend Growth Stocks

We now have a bit below ten stocks in the list, so that's good amount for example to start a portfolio. They are all undervalued and really are good purchases at the moment. 

You can see from this list that there are some big names in there like the 3M company, ADM, IBM as well so really large companies that are currently a good purchase.

So that's how I personally choose my stocks that I add to my portfolio and really this has a big impact on the future of the portfolio because you really want to buy the stock at the right time when it has great returns and when it is undervalued so it really grows and really help you get a great portfolio in the future.

How to automatically find undervalued stocks?

Before we end this article I just wanted to show you something more. There is a paid feature of TrackInvest called investing ideas. For example here is an automated list of undervalued stocks that are based on the same criteria that I showed you before:

How to Select Undervalued Dividend Growth Stocks

Basically you can use those automatically generated lists to track and be alerted also when a new stock become undervalued and fits your criteria.

For example you could completely create your own list where you have the same criteria that we applied before, and for example be automatically alerted when a new stock is entering the list so you can add it to your portfolio.

So that's another way to automatically track undervalued dividend growth stocks even without having to go in there every week or so and apply in your filters: this can be done in a completely automated fashion using TrackInvest.

So this is already the end of this article, I really hope that you enjoyed it and that it will help you select the best dividend growth stocks for your portfolio!