In my previous article, I showed you How I make $500 a month in Dividend. In this instalment, I will be showing you the strategy I used to pick dividend stocks.
What Are Dividend Stocks?
Dividend stocks are companies that pay out consistent dividend. They are usually companies with stable cash flow and good fundamentals.
How To Pick Dividend Stocks
Here are the 5 metrics that I like to look at when it comes to picking dividend stock.
The first 3 are mandatory for me when it comes to picking a dividend stock. The 4 and 5 metrics are good to have.
1. At Least 3% Dividend Yield
Because I am investing in these stocks for income, I like to look for stocks that yields at least 3%.
This can be a different number for you. But the dividend yield you choose should beat the risk free yield, which shouldn’t be hard to beat these days. US 10 year Treasury is at a low of 0.895%.
In Singapore, we have the CPF OA and SA which yields at 2.5% and 4% respectively. The only downside to putting monies in the CPF is, you can’t withdraw the money until age 55.
How To Calculate Dividend Yield
Annualized Dividend / Share Price
Or just simply head on to Morningstar website -> under Foward Div Yield to check for the dividend yield.
2. Payout ratio < 70%
Payout ratio is the amount of earnings that is paid out to shareholders in the form of dividend.
I like to look for companies that has a payout ratio of 70% and below. This means that that that payout is sustainable. They are paying dividend from the earnings. And they are also able to retain some of the earnings for growth.
Having the payout ratio at < 70% also means that there is room for the company to maintain dividend should a crisis hit.
Avoid companies that has a payout ratio that is greater than 100%. This could mean that they could be using debt to pay shareholder dividends or pending a dividend cut.
How to calculate Payout ratio?
Dividend Per share / Earnings Per Share
Or just simply head on to Morningstar website -> under Key Ratio -> Full Key Ratios Data
3. Consistent Dividend Payout
As a dividend income investor, you want to seek stable dividend payout. So the companies that I look for needs to pay a stable or growing dividend over the last 5-10 years.
On top of that, I also like companies that were still able to pay out dividend during crisis period. This means that their business is sustainable, and they were able to survive during the crisis.
4. Pick Well Established Companies
The last thing I want to see happen is to have a company go under water. Picking a well established company will reduce the likely hood of it happen.
A well established company is one that has been around for a long time. It is also well known in the particular industry that it is at.
5. Growing Earnings = Growing Dividend
A growing earnings means that the company has a strong business in their industry. And usually if a company has an increase in earnings, they also tend to increase their dividend payout.
Putting It All Together
Below are a summarized steps on How To Pick Dividend Stocks
- At Least 3% Dividend Yield
- Payout ratio < 70%
- Consistent Dividend Payout
- Pick Well Established Companies
- Growing Earnings = Growing Dividend
Let’s use OCBC Bank (Singapore company) as an example.
I like to use the Morningstar to do these metrics checks, because they have all the data there. These data are accurate as of 25/11/2020.
In 2010, the Dividend Payout was $0.28. Fast forward to the end of 2020 (TTM Trailing 12 Months), the payout has increased to $0.44. They have actually managed to increase their dividend by almost 60%.
The Payout Ratio for OCBC has also been consistently below 50% from 2010-2019. It is only for this year that the ratio has increased to 62%. But then again, for them to be able to continue to pay out dividend during 2020 (Covid Pandemic), it just tells you that the company fundamental is strong.
We can also see that OCBC Bank has consistently increase their earnings from 2010-2019, which leads to the growing dividend payout we see above.
As I am based in Singapore, I know that OCBC Bank is a very well established bank in Singapore, so the likely hood of it going under water is very low.
So based on the above, I would pick OCBC Bank as a dividend stock in my portfolio.
Disclosure: I am vested on OCBC Bank.
FAQs About Dividend Stocks
How long do you have to hold a stock to get the dividend?
When a stock declares dividend, there will be a Ex-dividend Date/Ex-Date that comes with the announcement. As long as you hold the stock until the Ex-Date, you will be entitled to the dividend.
Example: APPLE(AAPL) declares dividend with a Ex-dividend Date on 06 Nov 2020.
If you sell the stock before 06 Nov 2020, you will not be entitled for dividend.
If you buy the stock on 06 Nov 2020, you will not be entitled for dividend.
If you buy the stock before 06 Nov 2020, and you hold until 06 Nov 2020 before you sell it, you will be entitled for dividend
When are dividends paid?
When a stock declares dividend, there will also be a Payment Date/Pay Date that comes with the announcement. The Payment Date is the date that the stock will pay out the dividend to eligible shareholders.