Criteria for Selecting Dividend Stocks

Written by The Dividend Guy on August 21, 2007

Selection of dividends stocks, whether you are talking about high dividend stocks or low dividend stocks, is not the easiest thing to do in the world. However, the very nature of dividend investing is easier than small-caps for instance. When we look at companies that have been around for a number of years, and are consistently increasing their dividends then we tend to be looking at stable and safer companies. This of course is not always the case, but I would say it is true more often than not.

There is a lot of criteria that an investor can use to select dividend stocks and a lot of different opinions on what investment professionals deem as the correct criteria. I beleive it is a good idea for an investor to consider multiple approaches and choose a combination of them to create a strategy that works for them personally. One particular strategy that has been written about is by Rob Carrick, an investment reported from the Globe and Mail in Canada. In his article, he provides a few requirements that must be present to make up a list of what he is calling dividend all-stars. These requirements are as follows:

1. A yield above 1.3 per cent, which is an arbitrary threshold that was applied so that some high-quality but lower-yielding stocks would be included.

2. A strong record of growth in the dollar amount of dividends paid out over the past five years — the technical requirement was that dividends must have risen by an average of at least 15 per cent over any four-quarter period.

3. More than one dividend increase in the past five years, so that high dividend growth isn’t a result of a one-time event.

4. A payout ratio – the portion of earnings paid out as dividends — that is close to or below the average for the applicable sector so as to provide a cushion if earnings decline.

5. Solid earnings growth, which here means average annual increases of at least 10 per cent over the past five years.

I like this as it is simple and covers the basis for what would constitute a strong dividend stock: a record of dividend increases over time, a good dividend growth rate, a good payout ratio, and solid earnings. One comment I would add with respect to the payout ratio is that the payout ratio for a company should be looked at over a time period. A steady payout ratio is good to see, where as a increasing payout ratio is not as good as the company’s earnings may not be keeping up with dividend payments. This ratio cannot be looked at as a snapshot in time, but should be viewed over a period of time. Please see this post for more of my thoughts on this.

I know there are many other requirement lists that are out there. I am going to keep searching them out and write about them in upcoming posts.


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2 Comments so far

  1. 1wealthbuilder August 26, 2007 7:33 am

    Great post,

    I like the simplicity of the strategy when doing DD. I agree with you on the KISS aspect of it though. I doubt many other criteria strategies will be as straight forward.

    I would however include a “Buffetesk” criterion: companies that are not affected by trends or sweeping innovations (gum, soda, potato chips, etc.) usually provide an additional level of stability and hopefully safety.

    If there is such a thing.

  2. Yielder August 28, 2007 6:33 pm

    You cannot have dividend growth > earnings growth without the payout ratio increasing. Personally, I like to see dividend increases each year over an extended period rather than “more than one dividend increase in the past five years”. I like to see an fairly stable increase. Slowing dividend increases is an alarm bell.

    I also like to see a strong balance sheet with little debt since interest payments must be made before dividend payments and any earnings squeeze will result in a dividend cut before a default.

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