How to Select Dividend Paying Stocks
- 1). Scan for stocks with the highest dividend yield, for example, 4 percent and above. Any free online stock scanner will do. Other scanning parameters may include a minimum stock price (for example, $15) and a minimum daily trading volume (for example, 100,000 shares).
- 2). Eliminate stocks with a one-time high dividend or stocks that increase or decrease dividends with the economic cycle. You want stocks with a long history of paying dividends. This process may be onerous because you will need to check company news and investor relations web pages to review dividend payment histories.
- 3). Select stocks with a low payout ratio. The payout ratio is the percentage of net income paid out in dividends. A payout of over 100 percent is clearly unsustainable; a payout below 75 percent is OK. You want stocks that can increase dividends over time. A low payout shows that there is room for that, while a high payout suggests that the dividend will stay the same at best and may be cut at worst.
- 4). Look for stocks that increase dividends over time. These may not be the highest dividend payers but dividend increases make stocks more likely to appreciate in value.
- 5). Diversify by selecting stocks from several industries and industry groups.
