(This article originally appeared on The DIV-Net) As an investor who buys individual dividend stocks, I have developed a pretty robust methodology for evaluating the stocks that I include in my portfolio. I know that I am in no way a perfect investor and my process is far from perfect. In fact, I look to invest in index and pension funds in addition to my dividend stocks as a way to round out my portfolio and balance the risk of buying individual stocks. Individual stocks are riskier than index funds because of the diversification factor. However, I still enjoy individual stock selection and have decided to continue with it. The primary reason is that I am comfortable with the four key metrics I use when selecting my stocks!
Before you freak out on me, please note that I don’t only use these four pieces of data when deciding to buy or not buy a dividend stock. However, when examining dividend stocks I believe that these factors are the most important. They help set the tone for the performance of the stocks over the very long term (10 years plus). Not in any particular order, here are the four metrics:
1. At least 10 years of dividend increases
2. A three year dividend growth rate that is greater than 12%
3. An Earnings per share trend that is up, with no more than 2 down years in the past 10 years
4. A debt-to-equity ratio that is less than 50%
I believe that each of these metrics are what really sets a company up for success. The dividend increases is a no brainer – as dividend investors we want the compounding effects of a rising dividend. Add to that a dividend growth rate of 12% and the dividend doubles ever 6 years. If you reinvest your dividends this compound growth is dramatic. Dividends come from earnings so we want a company that is consistently growing their earnings. Finally, debt costs money and cash flow and if it is too high that can mean less for the company to pay out dividends. I want this number as low as possible.
I would love to hear your thoughts on this. If you have other metrics you believe are more important, please use the comments to let me know.