Dividend Screener

Dividend stocks can help strengthen your portfolio when the markets are down and give you regular income flow. However, knowing which dividend stocks to buy and the dividend stocks to pass on can seem like a puzzle to new investors.

We've put together a guide on how to invest in dividend stocks and strengthen your portfolio. By the time you're done reading, you'll discover the basics of dividend stocks, key fundamentals to consider as well as some practical steps for how to evaluate dividend stocks and put this information into action.

Dividend Stocks Basics

A dividend stock is a share of a company’s stock that entitles the owner to a periodic payment, typically quarterly or annually. The payment goes to shareholders who own the stock and usually makes up a percentage of a company’s earnings.

High-dividend stocks are popular with investors because they offer a regular high income stream which can help offset the volatility of the stock market. Many investors also view dividend stocks as a way to reinvest profits back into the company, which can lead to greater long-term growth.

High-dividend real estate investment trusts (REITs), for example, have dividend yields of 4% or more. High-dividend REITs can help build your income and also diversify your portfolio.

You may want to further diversify your portfolio by investing in the Dividend Aristocrat index to help reduce your exposure to company-specific risk. All Dividend Aristocrats are also dividend achievers, which means that a company increases its dividend payments for at least the last 10 consecutive years.

Ex-Dividend Date

It's crucial to understand the ex-dividend date in investing before you get started.

When a company pays a dividend, the ex-dividend date is the date on which the dividend is no longer payable to the shareholders who owned the stock on the record date. The ex-dividend date is usually two business days before the record date.

Special Dividend

Also consider the special dividend, which is paid out to shareholders in addition to the regular dividends that they are entitled to.

Companies can pay out special dividends for a variety of reasons, but they are usually paid out when a company has had a particularly good year and wants to share its profits with shareholders. Special dividends are not as common as regular dividends but can be a nice bonus for shareholders.

How to Evaluate Dividend Stocks

There are a number of factors that go into the process of how to evaluate stocks. Below are some of the most important things to consider.

Balance Sheet and Income Statement

Dividend stocks can be a great addition to any portfolio but it is important to look at the company's financials while evaluating stocks. The balance sheet and income statement are two important financial statements that can give insights into a company's overall financial health.

The balance sheet provides a snapshot of a company's assets, liabilities and equity. This information can be used to assess a company's financial stability and its ability to pay dividends. The income statement shows a company's revenue, expenses and profits. You can use this information to assess a company's profitability and its ability to sustain dividend payments.

Dividend Yield

A dividend yield is a financial ratio that measures the number of annual dividends paid out by a company in relation to its stock price. You can find the dividend yield in the stock prices of companies that have a history of paying dividends. 

The dividend yield is a popular metric for income investors because it provides a way to compare the annual income from dividends of different stocks. The higher the dividend yield, the more income the stock will generate.

Dividend Payout Growth

A company's dividend payout growth is the percentage increase in the company's dividend per share (DPS) from one year to the next. 

For example, if a company's DPS was $0.50 in 2020 and rose to $0.55 in 2021, the company's dividend payout growth would be 10% (($0.55 - $0.50) / $0.50). This metric is important to dividend investors because it measures the company's ability to generate additional cash to distribute to shareholders.

Dividend Payout Ratio

One of the best ways to measure a company's dividend payout growth is to compare its dividend payout ratio (DPR) over time. The DPR is the percentage of a company's earnings that are paid out in dividends. A company with a declining DPR over time is likely to have sustainable dividend payout growth.

Conversely, a company with a flat or rising DPR may not have sustainable dividend payout growth. Investors should also be aware of companies that have a high DPR but do not grow their earnings. These companies may be at risk of reducing or eliminating their dividend in the future.

Dividend Coverage Ratio

A company's dividend coverage ratio is a key metric used by investors to assess whether a company can generate enough cash flow to pay its dividend or not. The dividend coverage ratio is calculated by dividing a company's net income by its dividend payments.

The higher the ratio, the more able the company is to cover its dividend payments. A company with a dividend coverage ratio of less than one has not generated enough earnings to cover its dividend payments and may have to cut its dividend in the future.

Financial Ratios for Evaluating Stocks

Financial ratios can give you a birds-eye view of a stock's financial performance and desirability as an investment. They also allow you to compare groups of dividend stocks side by side. Here are some of the most important ratios for evaluating stocks.

Debt-to-Asset (D/A) Ratio

The debt-to-asset (D/A) ratio is a financial ratio that measures the percentage of a company's assets financed by debt. The D/A ratio is used to evaluate a company's financial leverage.

A higher D/A ratio indicates a company is more leveraged and therefore has a higher risk of bankruptcy. A lower D/A ratio indicates a company is less leveraged and therefore has a lower risk of bankruptcy. The D/A ratio is calculated by dividing a company's total debt by its total assets.

Debt-to-Equity (D/E) Ratio

Debt-to-equity (D/E) ratio is a financial ratio that compares a company's total liabilities to total shareholder equity. The D/E ratio is used to measure a company's financial leverage.

A higher D/E ratio means that a company has more debt than equity and is more leveraged. A company with a higher D/E ratio is riskier because it can have difficulty meeting its financial obligations if business conditions deteriorate.

A lower D/E ratio means that a company has more equity than debt and is less leveraged. A company with a lower D/E ratio is less risky because it has more cushion to absorb losses if business conditions go downhill.

Earnings per Share (EPS)

There are a number of ways to measure a company’s profitability, but one of the most common and important is earnings per share (EPS). This metric tells investors how much profit a company earns for each share of stock.

EPS is calculated by dividing a company’s net income by the number of shares outstanding. For example, if a company has a net income of $10 million and 10 million shares outstanding, its EPS would be $1. EPS is a key metric because it allows you to compare the profitability of different companies even if those companies have different share prices.

Price-to-Earnings (P/E) Ratio

The price-to-earnings (P/E) ratio is a financial ratio used to measure the relative value of a company's stock. The ratio is calculated by dividing the market value per share of the company's stock by the company's earnings per share. A high P/E ratio may indicate that a company's stock is overvalued, while a low P/E ratio may indicate that a company's stock is undervalued.

Price-to-Sales (P/S) Ratio

The price-to-sales (P/S) ratio is used to compare a company's stock price to its revenue. It is calculated by dividing a company's market capitalization by its total revenue. 

A low P/S ratio may indicate that a company's stock is undervalued, while a high P/S ratio may indicate that a company's stock is overvalued.

Return on Equity (ROE)

The return on equity (ROE) ratio measures the profitability of a company in relation to equity. You can calculate it by dividing the net income by the shareholder equity. The ROE is a good indicator of how well a company manages itself and how efficiently it uses its equity. A high ROE indicates that a company generates a lot of profit from its equity.

5 Steps for Evaluating Dividend Stocks

Here are some practical steps to take to help you evaluate dividend stocks.

Step 1: Review the company's dividend history.

A company's dividend history can tell you a lot about its overall financial health and performance. Knowing how to review a company's dividend history can help you make more informed investment decisions. Dividend history can be found in a company's annual report or 10-K filing as well as using tools such as MarketBeat under the "Dividend" tab. On the dividend page, you can also quickly screen for what stocks have dividends and what stocks don't pay dividends. 

Step 2: Examine the company's payout ratio.

A company's dividend payout ratio is the percentage of its earnings paid out in dividends to shareholders. It's one of the most important steps in evaluating a dividend stock.

A company's dividend payout ratio can be a good indicator of its dividend policy. If a company has a high dividend payout ratio, it may pay out most of its earnings in dividends, which could leave little room for earnings growth. If a company has a low dividend payout ratio, it may reinvest most of its earnings for future growth.

Step 3: Analyze the company's free cash flow.

Investors in search of dividend stocks should look for companies with a strong free cash flow. Free cash flow is the amount of cash that a company has left over after it has paid its expenses, a key metric in determining a company's financial health.

One easy way to do this is with the free cash flow (FCF) ratio. A higher FCF ratio indicates that a company generates more cash flow from operations than it uses to invest in capital expenditures, which is a good sign for dividend investors. 

Generally speaking, a company with an FCF ratio of 0.25 or higher may be a good dividend stock.

Step 4: Review the company's balance sheet.

Here are a few things to look for when analyzing a dividend stock's balance sheet:

• Cash and cash equivalents: This is the money a company has on hand to pay bills and meet other obligations. You want to see a healthy cash balance which indicates the company is in good financial shape.
• Accounts receivable: Accounts receivable refers to the money owed to the company by its customers. A high accounts receivable balance could indicate that the company will have difficulty collecting payments.
• Accounts payable: Accounts payable refers to the money owed to suppliers and other creditors. A high accounts payable balance could indicate that the company will have trouble meeting its financial obligations.

Step 5: Consider the company's valuation.

Also consider valuation. A stock may have a high dividend yield but if the stock price is overvalued, the dividend may sustain itself. Here are a few things to look at when considering a dividend stock's valuation:

• Price-to-earnings (P/E) ratio: This ratio is a good starting point for valuation. A stock with a lower P/E ratio usually costs less than one with a higher ratio.
• Price-to-book (P/B) ratio: This ratio compares a stock's price to its book value (assets minus liabilities). A lower P/B ratio usually indicates a cheaper stock.
• Earnings growth: Consider earnings growth when valuing a dividend stock. If a company grows its earnings, that usually indicates a sustainable dividend.

Evaluate Dividend Stocks Before You Buy

Use financial ratios and your due diligence to evaluate dividend stocks based on the company's fundamentals. Follow a step-by-step process like the one described above to ensure you keep your bases covered.