Choosing Dividend Stocks

Its Make Money Monday and I’d like to share some information that I found helpful in seeking out and choosing dividend-paying stocks for investment.  

The tide of the markets will be changing soon. Maybe it is already changing.  I feel that now is the time for me to invest in the stock market for the longer term.  In keeping with my goal of creating passive and alternative forms of income, I have decided to begin using a longer-term strategy for investing in the stock market than I have previously used.  I will begin investing in high-performing companies that pay dividends.

 I went looking for information about investing in companies that pay dividends and ran across this article by Harry Domash on MSN Money’s website.  It had some very useful information about screening dividend-paying stocks for investment.  Mr. Domash’s formula seems to be a good tool for finding promising, low volatility stocks that will pay good dividend income for some time to come.   

Mr. Domash talks about the parameters he uses to find promising dividend-paying stocks.   I’d like to share his parameters with you and tell you which companies I concluded were worth further investigation.  I started with the S&P’s dividend aristocrats list.  This is a list of companies that have increased their dividends steadily over the last 25 consecutive years.  After all, investing in a company that has increased its dividend steadily over the last 25 years, even through this economic downturn, definitely sounds like a good place to start.

While any of these aristocrat companies may make a good investment, Mr. Domash’s parameters offer an additional level of scrutiny to apply in choosing companies for investment.  The parameters were easy to follow and made good sense to someone like me who is an elementary-level investor.  I was able to find this information about the stocks on the aristocrat list by simply researching the companies on Google Finance and Yahoo Finance.  Mr. Domash’s list of parameters consists of:

1.            Current Dividend Yield is between 2.25% and 5%

A stock’s dividend yield is the amount of its dividend for the next twelve-month period divided by its share price. 

2.            Five Year Average Dividend Growth is >5%

3.            Return on Equity (ROE) is > Industry Average ROE

A stock’s return on equity is a company’s net income divided by its shareholder’s equity.  Mr. Domash recommends gauging the company’s profitability based on whether the company’s return on equity is greater than or equal to the average of the company’s overall industry.  

4.            Leverage Ratio < 10

Mr. Domash recommends using the leverage ratio to filter out the strongest dividend-paying banks.  The leverage ratio is a measurement of debt by calculating the total assets of a company divided by the amount of its shareholder’s equity.

5.            Earnings Per Share (EPS) Five Year Growth > 10%

A company’s earnings per share are generally equal to the company’s total annual earnings divided by its outstanding shares. 

6.            Mean Analyst Recommendation = Buy or Hold

7.            Institutional Ownership > 40%

Mr. Domash’s discussion of these parameters can be found here.

Using the list of dividend aristocrats and applying Domash’s parameters, with the exception of # 4 because I am not ready to get back into banks, I chose Avery Dennison (AVY) and Bemis Co. Inc. (BMS).   This begins my journey into dividend-paying stocks.  

I read recently that BMS will be making its twenty-sixth consecutive annual increase in dividends this year.  As for AVY, with Q4 profits falling 46% and a workforce cut of 10%, the maker of pressure-sensitive materials and office consumer products has gotten off to a rocky start this year.  But, my longer-term investment strategy requires me to stay through these occurrences so far at the beginning of this year and look forward to the payment of dividend income over the next twelve months.  I will do periodic follow ups throughout this year to monitor the health of these companies. 

Are you ready to get back into the stock market?  Would you consider investing in dividend-paying stocks?




Filed under investment, Make Money Mondays, Passive and Alternative Income

2 responses to “Choosing Dividend Stocks

  1. Pingback: Monthly Dividend Stocks as Steady Passive Income Sources « Aspire to Grace

  2. Pingback: Dividend Stocks, My 1st Quarter Results « Aspire to Grace

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