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What are Stock Dividends [4 Factors to Find Best Dividend Stocks]

Stock dividends explained and four ways to find the best dividend yields

Few investing strategies are as popular as stock dividends and for good reason. Dividend stocks have regularly beaten the rest of the market as well as providing a guaranteed positive return in that cash yield.

In fact, I’ve used four factors to build a portfolio that provides a 4% annual cash return plus double-digit price returns every single year.

The video is one in a special series for beginning investors I’ve created for the YouTube channel, Let’s Talk Money. I love the face-to-face interaction we get in the community on the channel and I’m sharing everything I’ve learned over almost two decades of investing.

Join the community on YouTube. It’s Free and you’ll never miss an episode.

How Stock Dividends Can Make You Rich

Dividend investing is one of the few strategies to consistently, year after year, beat the rest of the market. A famous study by Ned Davis Research over nearly 40 years of stock market returns showed companies that regularly increased their dividend payment blew the rest of the market returns out of the water with a 9.5% average annual return.

Dividend Stocks Returns

Dividend Stock Returns versus the Market

I’m going to start off with the basics of dividend investing, what are dividends, but then I’ll share four factors I use to find dividend stocks. You won’t find these four factors on any stock screener. You won’t find the strategy on any website but that’s why it offers those solid returns every year. I’ll also walk you through how to use these factors to find stocks on any online investing site.

This is just a part of what I talk about in Step-by-Step Dividend Investing, a complete guide to dividend stocks and income investments. In the book, I not only reveal the strategies that will create a portfolio of dividend-paying stocks but I also walk you through investing in other income-producing assets that provide more cash flow at lower risk.

So I’ll talk a little about what are stock dividends and why dividend investing is a major part of my portfolio but I really want to get to those four keys to finding dividend stocks. It’s important to understand those basics of dividends but it’s so much more fun to talk about finding those stocks that are going to put cash in your pocket every few months, right?

how to find best dividend stocks

Dividend Stocks Explained

Any successful company has a choice for it’s profits, either reinvest for growth or return those profits to owners. In the early years when management is laser-focused on growing the business, everything may be reinvested but over time, more and more of those profits start going back to owners or shareholders of the company.

That’s exactly what stock dividends are, pure and simple. Dividends are your reward for investing in great companies.

Most companies pay dividends on a quarterly basis, once every three months. Management reports to the board of directors about cash flow and business growth then the board approves the cash return to investors.

Now this dividend decision is hugely important and most investors don’t realize this but paying a dividend is a big decision. You can’t just start a dividend and not be able to maintain it because investors will depend on that cash payment. Paying a dividend means planning out years in advance to make sure the company is going to have the cash flow to maintain it and even increase the payout.

That’s one of the biggest benefits to investing in dividend stocks, that stability and what it means to the company’s management. Management knows it has to produce the cash flow to meet this dividend or there’s gonna be hell to pay. Studies have proven this, that companies that pay a dividend are less likely to go after projects with questionable returns or to make those expensive acquisitions of other companies.

Management is forced into this good stewardship of your money. There isn’t as much free money sloshing around so management has to reinvest it more efficiently.

It’s a great advantage of dividend yielding stocks but the best benefit is just in a higher return on your investment. Dividend stocks just offer higher total returns than other stocks not only from the cash payment but on price returns as well.

Dividend Yielding Stocks as Part of Market Return

That cash payment from dividend stocks is a big part of the return from stocks. In fact, in decades going back to 1940, dividends have accounted for as much as half the return on stocks. That means, not understanding dividend stocks or not using them in your portfolio, you could be missing out on the best part of the market.

Passive Income Dividend Returns on Market

I love talking about dividend stocks and we could easily go on for hours talking about why dividends need to be a part of your portfolio but what I really want to get into are some of the factors I look for in dividend stocks.

Just throwing your investment in any stock that pays a dividend isn’t going to get you those sweet returns. In fact, there are a lot of dividend stocks out there that are more risk than they’re worth and where the cash payment is at risk of being cut.

Factors I Use to Find Dividend Stocks

So I want to show you the four factors I look for, four factors that have helped me get a 4% cash yield on my portfolio plus a double-digit price return. That’s a dividend yield twice as high as the broader market and price returns every single year.

First, and this isn’t one of the four factors but it’s extremely important. You have to understand the trade-off between dividends and growth in a company. Once you understand that decision management has to make with paying the dividend or reinvesting profits then you can look for these factors that will help you get both cash and price return.

The idea is to find companies doing both, returning cash to investors through the dividend but still with the capacity to reinvest and grow the company.

My first dividend screen here is to start with stocks paying a 3% yield or higher. The broader market pays about a 2% dividend so anything lower than three percent and I’m not interested. A dividend yield over 3% tells me that the company is serious about cash return to investors.

The next factor I look at is the payout ratio which is just the year’s dividend divided by the earnings per share, more accurately you should be looking at the total dividend payment divided by cash flow from operations or operational income because it’s a purer way to look at the company’s earning power. I like using cash flow from operations because it’s less easily manipulated by management than earnings.

Anyway, you want to see a company that is paying out less than 60% of its earnings per share as dividends. I know that you’re looking for high dividend returns but we have to get back to that trade-off between dividends and reinvesting in the business.

A company returning more than 60% of its profits, its earnings, as a dividend to investors just isn’t going to have the cash left over to grow. Remember that long-term average return from companies that regularly increased their dividend payment, it was 32% above even the average return on companies that paid a dividend but didn’t regularly increase it. Well saving some of those earnings back is how they grow and increase their dividends.

From this list of high dividend payers and companies keeping something back for growth, you check the dividend history over the last five years and especially through the most recent recession. This is our third factor and one of the best for long-term success with dividend stocks.

It’s one thing to pay a solid dividend when the economy is on solid ground and business is booming, it’s something else entirely to commit to that dividend history even in bad times. So I’m looking for stocks that increased their dividend regularly or at least kept the payout stable through the last recession.

Our final factor, and this is one that is almost universally overlooked by dividend investors, is I look at the cash yield on the buyback program.

So besides returning cash to investors through a dividend, companies can also buy back their own shares. They use that extra cash to take shares off the market and a lot of investors don’t realize it but this is also a cash yield just like dividends. Taking those shares off the market means that profits are spread across fewer shares so those shares of stock you own are more valuable.

In fact, over the last decade, these share repurchases have become a big part of the total cash return for investors. Companies in the S&P 500 are returning about $400 billion in dividends to investors every year but are also buying back over $600 billion in shares.

dividend stocks with share buybacks

Finding those companies with aggressive share buyback programs is how I get those double-digit price returns every year even on stocks that pay out a 4% dividend yield.

Now you’re not going to find all four of these factors on a simple stock screener and that’s what makes them so powerful. In the video, I’ll show you how to use each of these factors to find dividend stocks using publicly-available information online.

This has been a longer video than usual but I love talking about dividend stocks and I think it’s a great opportunity for investors. Use the four factors to find your dividend investments and I’d love to hear your dividend investing strategies so scroll down and let us know in the comments how you pick dividend stocks.

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