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Willie Keng, CFA

Willie Keng, CFA

Chief Editor

5 Quick Ways to Pick the Best Dividend Growers

Before sinking your money into stocks, check out these simple steps will help you pick some of the best dividend stocks while avoiding the risky companies from your portfolio.

I remembered walking out of the exam hall years back, having sat for a final year module I didn’t prepare for. 

But I heaved a sigh of relief. The cheat sheet I borrowed from a friend few days before the paper helped me a lot. It gave me a short-cut to all the formulas, model answers and a mind map on how to tackle one of the toughest papers in Engineering — thermodynamics. 


Here’s 5 quick ways to get you started picking the best dividends stocks (and it’s not just looking at the yield). Dividend growth investing is the greatest, easiest, most rewarding investment strategy in the world!

All of them are equally important. 

So, onward.

1. Check for Growing Sales and Earnings

This is the very first thing you want to pay attention to. When you’re picking the best dividend growers, you want to find solid businesses which can grow their sales and earnings year after year. Why? 

This shows there’re signs the company has a durable competitive advantage. 

Growing sales means there’s big demand for a business’s product and services. 

While growing earnings show that the company has a resilient business model. 

The point is this — You don’t want to pick businesses which grows their sales aggressively, but they have been making losses year after year. There’s no way you’ll get your dividends this way.

2. Have a Consistent Track Record of Dividend Raises

Next, the stock must have a long history of raising their dividends. 

You see, if a business can pay you rising dividends, it tells you that a business is profitable enough to reward its shareholders. 

Here’s a tip — You want to see if a company has at least 10 years of successfully raising its dividends. 

You can check out Dividend Aristocrats — stocks which consecutively paid at least 25 years of rising dividends. 

Or Dividend Kings which consecutively paid at least 50 years of rising dividend. 

Having a long track record gives you a better prediction of whether the company can continue to raise its dividends over the next 5, 10 or even 20 years. 

Of course, do note that this is not a one-size fit all rule. If you looked at the recent Covid-19, there’re Dividend Aristocrats and Kings have cut their dividends. 

Let me show you how you can quickly check this.

Look at Johnson & Johnson (Ticker:JNJ) below.

 

Source: www.morningstar.com

 

Let me explain here. JNJ has not only paid dividend to its shareholder over the past 10 years, but it has successfully raised its dividends year after year. 

Let’s look at the period between 2010 to 2019.

If you’d owned a share of JNJ in 2010, you’d get $2.11 of dividends per share for 2010. 

And if you’d continued to hold the stock till 2019, you’d collect $2.25 of dividends in 2011, $2.40 in 2012, and so on. In 2019, your dividends collected for that year would be $3.75 per share. 

That’s $28.80 of dividends paid to you over the 10 years. 

Well, imagine if you’d owned 100 shares of JNJ — that’s $2,880 of dividends paid to you.

If you’d owned 200 shares, that’s $5,760 of dividends paid to you. 

Think about it. If you’d invested another 9 more stocks paying you the dividends JNJ is paying you…

 

Of course, do note that this is not a one-size fit all rule. If you looked at the recent Covid-19, there’re Dividend Aristocrats and Kings have cut their dividends. 

 

3. Dividend Payout Ratio is Less Than 70%

This is a valuable tool here. When you look at companies which pays dividends, you want to make sure it does not pay out more dividends than what it is earning.

A quick way is to use the dividend payout ratio to find out.

Dividend Payout Ratio is the percentage of dividends a company pays out from its yearly earnings.

It looks something like this.

 

If the ratio exceeds 70%, the company may not reinvest enough earnings into the business. 

An exception is a REIT, as it pays out most of its earnings as dividends. This is to reduce corporate income tax. 

Let’s look at JNJ again.

You can see its dividend payout ratio is reasonably between 44% to 70% over the past 10 years.

If the ratio exceeds 70%, the company may not reinvest enough earnings into the business. 

An exception is a REIT, as it pays out most of its earnings as dividends. This is to reduce corporate income tax. 

Let’s look at JNJ again.

You can see its dividend payout ratio is reasonably between 44% to 70% over the past 10 years.

It’s as simple as that.

 

4. Company Has a Durable Competitive Advantage

It’s as simple as that.

 

#4: Have durable competitive advantage

 

This is one key feature all successful dividend companies must have — a business with a durable competitive advantage.

What we're trying to do... is to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle with an honest loard in charge of the castle.

Warren Buffett
berkshire hathaway ANNUAL SHAREHOLDERS' meeting 1995

 

The company you pick could be a lowest-cost producer in some regions, or have very strong branding, or simply sell products or services that customers find it hard to switch.

 

#5: Dividend Yield Around 1 – 3%

 

Dividend yield is the company’s annual dividends per share dividend by its share price. 

 

Of course, a high dividend yield will get your greed glands going. When you’re picking dividend growers, you want dividend yield to be around 1% to 3%. Why so low?

 

A high dividend yield stock could mean that the business is in trouble, that’s why the stock is trading at a low share price (causing the yield to go up) — aka Value Trap.

 

Don’t worry about the low yield. If you’d pick the best dividend growers, your dividend yield will increase over time. 

 

Think about it. 

 

Let’s say you’d bought a stock with a dividend yield of 2%. The company grows over time and it doubled its dividends over the next few years (which is highly possible). 

 

Your dividend yield on the stock would have easily doubled to 4%. And let’s not forget that the stock price can go up too.

 

There you have it. 

 

This is 5 quick ways to successfully pick your dividend growers to invest.

 

Of course, it’s not just about looking at dividend yield alone.

 

I hope this little cheat sheet helps you along the way.

 

Chat soon…

 

Willie Keng, CFA

Willie Keng, CFA is the founder of Dividend Titan, a financial publication for self-managed investors. A former research analyst for top private banks, Willie today runs his own consulting firm. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.

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