Today I will be talking about my stock picking strategy when it comes to purchasing dividend stocks. These are literally the basics and the minimum requirements a company has to have, before I even consider purchasing some of their shares. Now, early on in my investing career I did not follow this strategy. I did have it in the back of my mind, but I wanted to be a bit more of an aggressive investor. I burned myself with that one and learned my lesson quickly. There are so many different investing strategies out there. Let's have a look at how I approach things.
My Dividend Stock Picking Strategy!
All of my dividend stocks are currently U.S. Stocks from the NYSE or NASDAQ. I sometimes play around on other markets, but let's keep that aside for now. Let's have a look at my strategy.
The company must have an increasing dividend growth for a minimum duration of 10 years.
Because a company doesn't just pay out dividends because they feel like it. They do it because their company is doing well and they value their shareholders. When a company decreases their dividend payout there is something seriously wrong with them. This is an easy sign I look at for fast screening of possible companies I'd like to purchase shares from. The key to success here is to find companies that have been paying out dividends for at least or more then 10 years increasingly. Steady dividend payout woud work as well, but then I would look at other factors. Ideally you want to go with a company that has been increasing their shares for over 10 years.
Here is an example of a company that has been increasing their dividend for about 10 years. This is a very important part of my dividend stock picking strategy.
2. The company has to be a U.S. company with franchises/devisions/stores in other continents/countries.
Now, this requirement isn't absolutely necessary, but I always try to pick a company that fulfills this requirement. You might not hear this from other people's strategies, but the reason I choose for this one is pretty simple. The more a company is involved in different continents and different countries, the more info you have access to. You hear news about those specific companies from different countries showing you different numbers. Also, worst case if the U.S. economy would completely collapse and companies would go down, chances are that these specific companies would survive because their foreign affiliates would still be fine. Now, in real life if the U.S. economy would go down the entire planet would feel that, but you get the point.
3. The stock must yield a minimum of 3.00%.
Because anything lower then that is not worth it to me. I could change my opinion on this one if the price of the stock is right, but chances are it won't if it meets my other 2 requirements. At least, that's if my current investing budget won't change. Incase of an increase I could play around with this number and go a little bit lower and buy more shares. Only if it would be worth it to me. Some people may say that 3.00% is a bit high, but I believe this is a good and solid normal number.
4. The stock must have a P/E (TTM) no higher than 20.
P/E ratios are a bit tricky. In my words, I try to look at this data to make sure that the stock is not overpriced. A stock with a lower P/E is not always better, that's why I said it's a bit tricky. For more info on why this is so difficult to determine click here. Regardless, when I am picking a stock, I try to stick to this number. Paying 20 times what a company earns is still a lot. I wouldn't advise to go over it or you'll be considered investing in high risk companies. And to be honest, that's more kind of seen as speculating.
5. The company must have at least a Yield On Cost (YOC) of 6.00%.
Because the beauty of investing in dividend stock is called compound interest. You'll want to make sure it's worth your time, investment and money. Anything less then 6.00% is not really anything I would be interested in, although there are always exceptions. I would say that anything less then 6.00% is not worth my time at all, but you can decided this number for yourself. I'd say this is one of the more important numbers to look out for. You'll definitely want to include this in your dividend stock picking strategy.
6. The Dividend Payout Ratio of the company must be at least below 80.00%.
This number may still be bit on the high side, but whenever a company pays out more then they earn, there's no way they could keep doing this for a long time. That should also show that there is something wrong with their money management/ accounting department. If the payout exceeds earnings for too long they will eventually lower or even cut the dividend resulting in loosing all the hard work that you put in there. This is a good sign that the company is going downhill. Hopefully by the time you are seeing the signs it is not too late.
There you have it. This is my dividend stock picking strategy. And to be honest, these are just the basics. After that I have a closer look at their annual report and start doing some more research. It's a good way to start. I sometimes change my requirements, depending on the company I'm interested in, but in general I'd say this has worked for me. I can say that whenever I don't use this strategy, things don't turn out that well.
I hope you've enjoyed reading into my dividend stock picking strategy and feel free to comment on the comment section down below. I'm always eager to learn more and hear other people's strategies. Before you start investing you'll want to contact a professional financial advisor to get some more details and better advice on what other options you may have. This is just my strategy, which works for me. Good luck and keep me posted on your experiences!
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