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 How to Find the Best Dividend Stocks 

With the market for tech and other growth stocks arguably in over-exuberant territory, this may be a good time to consider dividend-paying stocks.

Since dividend stocks make regular cash payments to shareholders, you can score a worthwhile return even if the overall market peters out. If the market stays strong, you’ll probably enjoy share price appreciation plus the steady dividend income.

Here’s a screen for finding relatively low-risk dividend payers (Screening is a process for scanning the market for stocks meeting your specific requirements). It uses the FINVIZ user-friendly free screener that I introduced in my last column.

Find it from the FINVIZ homepage (finviz.com) by selecting Screener. FINVIZ calls its selection parameters “filters.” On the Filters bar, select “All” so that you can see all of the available filters at the same time. Use the associated dropdown menus to select the desired filter values. Here are the details for my dividend stock screen.

Dividend Yield
Dividend yield is the next 12 month’s expected dividends divided by the price you pay for the shares. For instance, the yield would be 10% if you paid $10 per share for a stock expected to pay dividends totaling $1 over the next 12-months. I required an “over 4%” yield, which is a lot higher than banks are paying these days. Try raising that requirement to “over 5%” if you want to restrict your list to higher yielding stocks.

Not Too Small 
Generally, larger companies are safer bets than smaller firms because they have the product diversity and experience to survive unexpected turns in the economy. Market capitalization, which is how much you’d have to shell out to buy all of a firm’s shares is the way most analysts measure company size. Market-caps range from as low as $50 million to more than $150 billion for the likes of Google. I specified “over $2 billion,” which limits the field to “mid-cap” and larger stocks. Try cutting your minimum to “over $300 million if you want to see more stocks.

Profitability measures how efficiently a company uses its assets to generate earnings. Return on equity, the most widely used profitability gauge, compares net income to shareholders equity (book value).

If we were looking for high-growth stocks, we’d want to see a minimum 15 percent ROE. However, dividend -paying stocks tend to be slower growers and I only required “over 10%” for ROE. Try increasing your minimum to “over 15%” if you want to limit your results to the most profitable companies.

Low Debt
Given the problematic credit markets, low-debt firms are safer than high-debt companies. That said, most dividend stocks are mature companies that have built up some debt. Thus, requiring no-debt would rule out most dividend payers.

The debt/equity ratio, which compares total debt to shareholders equity (assets minus liabilities), is a widely-used debt measure. A zero ratio indicates no debt, and the higher the ratio, the higher the debt. I required an “under 0.5” ratio, which equates to moderate debt. Try cutting you maximum to 0.3 or 0.4 if you want to limit your list to lower debt firms. 

Smart Money 
Thanks to the huge trading commissions that they generate, institutional buyers such as mutual funds have more access to market moving information than individual investors. Thus, if they don’t own a stock, you shouldn’t either. Institutional ownership, the percentage of a firm’s shares held by these big players, ranges from 40 percent on up for in-favor stocks. I specified “over 40%” for institutional ownership.

Price Action  
A stock’s recent share price action tells you a lot about how other investors view its outlook. Given the recent strong market. The fact that a stock has gone down instead of up signals added risk.

You can compare the current share price to its moving average (average closing price of a specified period) to determine whether a stock has generally been moving up (uptrend) or down. Stocks trading above their moving average are said to be in uptrends. I used the 200-day (simple) moving average and required passing stocks to be above the MA.

My screen turned up five stocks, all solid companies and major players in their industries.

 • Bristol-Meyers Squibb (BMY), a pharmaceutical maker currently paying a 5.6% dividend yield.

 • Genuine Parts (GPC), a replacement auto parts distributor (4.1%).

 • Mattel (MAT), a maker of toys and dolls (4.2%)

 • Microchip Technology (MCHP), a semiconductor chipmaker (4.9%)

 • Paychex (PAYX), a payroll service provider (4.0%)

Be aware that all stock screeners sometimes turn up erroneous dividend data. Verify everything. If you expand your search to include smaller market-cap stocks, you will probably turn up stocks paying much higher yields. Keep in mind that yields much above 8% signal high risk.

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

published 9/27/09

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