At any given time there are literally thousands of different dividend stocks to consider an investment in. Of course, not all of them are worthy of your hard earned money. In this article, I am going to help you develop a list of potential dividend stocks that you can add to your portfolio.
It is important to note that through this process you will not know whether the stock is worthy of investment at this time. It is to generate a list of potential investments that you can then dive into for a deeper review. Think of it like a weeding out exercise![ad#tdg-embedded]
You can see my results in the Google spreadsheet attached at the bottom of this post.
1. Start with a Broad List
For dividend stocks, this is easiest done via either the Dividend Achievers or Dividend Aristocrats lists. The former is a list of dividend stocks that have increased their dividends for at least 10 years and the later has increased dividends for at least 25 years. If you are in the hunt for dividend stocks, then these two lists are the best places to start. I have used the Dividend Aristocrats list as my starting point.
2. Enter the 5-Year and 3-Year Dividend Growth Rates
This step takes a bit of work because it is manual. However, I have done a an initial stab at the work for you in the attached spreadsheet.
I had to go out to the internet to find a dividend growth rate that I could work with. One of the best resources I have seen is the one available at the Motley Fool Caps site. Here is the link:
On the page this link takes you to is a chart that shows the dividend growth rates for 1-yr, 3-yr, and 5-yr periods. To get to the specific site for each of the stocks on the Dividend Aristocrats list, simply substitute the bolded ticker symbol in the middle of the link with the ticker symbol for each stock. The link above is for 3M. For Coca-Cola the link would become:
Now enter both the 5-year and 3-year dividend growth rates into your spreadsheet.
3. Sort that list by 5-year dividend growth
The next step is to do some sorting of that broader list. I want to see a longer term trend so I like to sort by the 5-year dividend growth rate.
4. Determine if Dividend Growth is Accelerating
Now we can do one last test before developing moving on. I think that many of the best stocks to consider now are the ones that are actually increasing their rate of dividend growth. That is easily determined by comparing the 5-year and 3-year dividend growth rates. If the 5-year dividend growth rate is higher than the 3-year growth rate then we can safely say that dividend growth has been accelerating. That is a positive sign.
5. Remove all stocks with a negative EPS for any period
With just that dividend growth screen we did, we managed to take the list of stocks from 41 to 29. Not bad, but I want to see the list of stocks that I move forward with to be even smaller.
One of the easiest ways to do this is to look at another important stock analysis metric: earnings per share. Using exactly the same page we used to identify dividend growth for our list of initial companies, have a look at the EPS Growth Rate chart and record the results. If any of the growth rates are negative, mark that down as a “No”.
6. Examine the Results and Move on to Further Analysis
With this set of real quick and initial criteria I have managed to weed the list of potential stocks for our dividend watch list from 41 down to 13. This is a much more manageable list.
What we know now is that we have a list of stocks with strong dividend growth, accelerating dividend growth, and no 1-yr, 3-yr, or 5-yr periods where EPS was negative. In my opinion, that creates a good starting point for intial analysis.
Where to Now
Your next step as a dividend investor is to now really dive into each stock and do a full analysis to determine if the company is worthy of your investment. One suggestion I have for you is the book, Fire Your Stock Analyst. This is a very comprehensive book that lays out a great process for full-fledged stock research.