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 How to Find the Best Dividend Stocks 

With the market for growth stocks looking a little rough, it may be time to take another look at dividend-paying stocks.

Unlike most stocks, where you only get paid when you sell, dividend stocks pay you to own them. Thus, you can make money even if the market goes nowhere. Further, when the market picks up, you might enjoy share price appreciation in addition to the dividends.

As is often the case, I'm going to use the user-friendly and free FINVIZ stock screener to demonstrate how you can pinpoint dividend payers worth considering. If you're not familiar with the term, stock screeners are software programs available on certain financial websites that allow you to scan the entire stock market for stocks meeting your selection criteria.

Start by selecting screener on the FINVIZ homepage (finviz.com). Then, select “All” on the Filters bar to see all of available selection parameters, which FINVIZ calls “filters.” For each filter that you want to use, select your desired search value from the filter's dropdown menu. Here’s how to set up the dividend screen.

Dividend Yield
Dividend yield is analogous to the interest rate that you'd receive on a bank's money market or savings account. Except, unlike an insured bank account, your principal could lose value if the market drops or if you pick the wrong stocks. Your dividend yield is your next 12 month’s expected dividends divided by the price you pay for the shares. For instance, your yield would be 10% if you paid $10 per share for a stock that ends up paying $1 of dividends over the next 12-months. To find worthwhile dividend payers, require a minimum 4% yield. Do that by locating the Dividend Yield filter and specifying “over 4%.

Not Too Small
Smaller firms are riskier than larger companies because they typically don't have the resources, diversification, and experience to deal with unforeseen economic events. Most analysts use
market capitalization, which is how much you’d have to shell out to buy all of a firm’s shares, to gauge company size. Market-caps range from as low as $50 million to more than $600 billion. Use the “Market Cap” filter and specify “over $2 billion,” which limits your list to “mid-cap” and larger stocks.

Profitability
Profitability is not the same as reported earnings. Instead, profitability measures how efficiently a company uses its assets to generate those earnings. Return on Equity, the most widely used profitability gauge, compares net income to shareholders equity (book value). Whatever your selection strategy, you’ll always do best by sticking with profitable stocks. Use the Return on Equity filter and specify “over 5%.”

Low Debt
All else equal, firms that don't carry much debt outperform debt-laden stocks.
You can use the debt/equity ratio, which compares total debt to shareholders equity (assets minus liabilities), to measure debt. A zero ratio indicates no debt, and the higher the ratio, the higher the debt. Specify “under 0.5 for Debt/Equity to limit your list to relatively low-debt stocks.

Follow the Money
Institutional buyers such as mutual funds and pension plans have access to better information than individual investors. Thus, you'll do best by sticking with stocks that these big players are buying. Institutional ownership, the percentage of a stock’s shares held by these “wired-in” players, ranges from 60% on up for in-favor stocks. Specify “over 70%” for institutional ownership.

Uptrending Stocks
A stock’s recent share price action tells you how other investors view its outlook. For this screen, you need stocks that are in uptrends, meaning that, despite short-term volatility, are generally moving up in price. You can limit your list to uptrending stocks by requiring that passing stocks be trading above their 200-day moving average, which is its average closing price over that period. Use the “200 day simple moving average” filter and specify “price above SMA.”

Six Candidates
My screen turned up six dividend stock candidates.

•  Colony Financial (CLNY): a real estate investment trust (REIT) that invests in debt secured by residential and commercial real estate. Dividend yield 6.0%.

•  Compuware (CPWR): Produces software used by large corporations to manage their operations. Yield 4.8%.

•  MFA Financial (MFA):  A REIT that invests in residential property mortgages. Yield  9.7%.

•  PacWest Bancorp (PACW):  A full service bank operating in California. Yield 4.4%.

•  Peoples United Financial (PBCT): A full service bank operating in the Northeastern U.S. Yield 4.5%

•  Potash Corporation (POT): A fertilizer producer headquartered in Canada.  Yield 4.0%.

Here's a link to the screen so you can see which stocks it's listing today.

Consider the results of any screen, including this one, as candidates for further research, not a buy list.

published 12/27/14

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