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You know we love dividend stocks here on the channel but there are so many traps to dividend investing. Investors are pulled in on high yields only to see the share price go nowhere or even fall. A high dividend yield does you no good if you lose money on the stock!
In this video, I’ll show you seven criteria for finding the best dividend stocks to buy, stocks that will produce a strong return as well as the cash flow. I’ll also take you step-by-step to building a dividend portfolio you can count on and then reveal that top dividend stock from the list.
Our first criteria is a dividend yield of 4% or more. Just like any of these, you can adjust it up or down but that level gives you a strong cash payout but still leaves room for growth. Don’t invest in high yield dividend stocks just for the payout. Make sure the company is keeping some back for growth. I also like to see dividend growth of at least 5% annually. You want to collect more cash in the future, don’t you?
You also want to check the payout ratio for the stock, that’s the percentage of earnings paid out to cover the dividend. If this is too high, the company may not be able to grow the dividend or may even have to cut it if earnings fall. You can look at the stock’s dividend history to see if it has increased the payout in the past and by how much.
I also like to look for signs of fundamental strength for the company in consistent sales growth and an improving operating margin. Just one of these can help the company grow earnings and increase the dividend but find a stock doing both and you’ve got a best stock to buy.
Finally, I’ll look at the total return of a stock because it’s not just about dividends. It does no good to collect cash flow if you lose money selling the stock at a lower price.
Building a good dividend portfolio means focusing on a diversity of dividend stocks as well as a mix between yield and return. Don’t just invest in the most popular dividend stocks in the most popular structures like REITs, MLPs or BDCs. Invest in different sectors and industries that will give your portfolio safety and constant cash flow. You can ladder your dividend stock portfolio by picking stocks that pay out in different months. It’s a great way to create consistent cash flow and live off your dividends.
0:00 Dividend Investing for Beginners
1:28 How to Find the Best Dividend Stocks – 7 Step Checklist
7:01 How to Build a Dividend Stock Portfolio for Safety and Constant Cash Flow
9:18 Best Dividend Stocks to Watch
9:46 The Top Dividend Stock to Buy Now
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.
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