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
Start by selecting
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 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
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 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%.”
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
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
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.”
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.
• MFA Financial (MFA):
A REIT that invests in residential property mortgages. Yield 9.7%.
• PacWest Bancorp (PACW):
A full service bank operating in California.
• 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
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.