Four steps to screen dividend stocks

When starting on your dividend growth investing path, selecting which companies you should include in your portfolio can be pretty daunting.  With thousands of companies to choose from within Canada, the United States, and Europe, It is natural to feel overwhelmed.

Companies that you are already familiar with are an excellent place to start. For example, I’m sure most people would have heard of Coca-Cola and could describe their core business. Maybe if your European, you will know a company like Danone.

But how do you know if these companies are a good fit for your portfolio?

In the beginning, having a set of rules to screen dividend stocks will help you narrow down your search and only chose top-quality companies.

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Step 1: Stick to Dividend Aristocrats

The first step to screen dividend stocks is to start with Dividend Aristocrats, as they have shown a history of increasing dividends over time. Even better, depending on the dividend aristocrat’s geographical region, it will have increased its dividend through at least one recession.

There are a couple of reasons for using dividend aristocrats as your starting point. First, they are more than likely blue-chip mature companies that have been around for decades and have some sort of competitive advantage in their markets. Second, it will be easy to find information on blogs, websites, and podcasts as most of these companies analyzed and reviewed in great detail. Finally, studying these types of companies will give investors confidence when they start to branch out to divided contenders and dividend challengers.

What is a dividend aristocrat?

The criteria to become a dividend aristocrat will vary significantly depending on its geographical region. Therefore, it is essential to note the difference when you begin to screen for dividend companies.

Dividend Aristocrats in the United States.

• Must be a member of the S&P 500
• Must have dividend increases for at least 25 consecutive years
• The float-adjusted market capitalization must be at least $3B
• The average daily trading volume of at least $5 million

Dividend Aristocrats in Canada.

• Must be listed on the Toronto Stock Exchange and a constituent of the S&P Canada BMI.
• Must have dividend increases for at least five years.
• Can maintain the same dividend for a max of two years.
• The float-adjusted market capitalization must be at least $0.3B.
• The company is to have increased its dividend in the 1st year of the prior five years of review

Dividend Aristocrats in Europe

• Must be an S&P Europe 350 Index member
• Must have dividend increases for at least ten years.
• Possess a float-adjusted market capitalization of at least US$ 3 billion 
• Has a median daily trading volume of at least US$ 5 million 

Related read:

Top 10 Best European Dividend Stocks for 2021

Step 2 –  Can the company afford to pay its shareholders.

Nobody likes to have their income cut; hence for income investors, dividend safety is essential. One of the best ways to screen dividend stocks and see if a company can afford its dividend is to check out its payout ratios.

Does the company earn enough profits to distribute a dividend? Conversely, is the payout ratio low enough to allow the company to pay a dividend even if they hit some headwinds?

The payout ratio can be a helpful indicator of the safety of a company’s dividend. It can also provide some clues into the potential for the company to grow the dividend.

Typically, a payout ratio of below 70% ensures there is room for further dividend growth. In addition, some of the more mature sectors, such as telecom and Utilities, will have strong income streams and will be able to distribute a higher portion of their cash flow as dividends.

For a refresher on calculating the payout ratio based on earnings and free cash flow, check out my article here.

Related Read:

Dividend Payout Ratio- How Safe is Your Dividend?

Step 3 –  Check out the company’s Debt Profile

The debt-to-equity (D/E) ratio measures the proportion of equity and debt used to finance a company’s assets. With this liquidity ratio, a higher ratio indicates the company is more levered, which typically means more risk. Therefore, dividend investors should pick stocks with a low debt-to-equity ratio to protect their dividends over the long term.

The debt-to-equity ratio can vary considerably depending on the industry. However, as a rule of thumb, choosing a company with a D/E ratio in the lowest 25% of its industry is an excellent place to start.

You can compare industry benchmarks at a website like ready ratios.

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Step 4 – Look for fair value

For income investors, dividends are the holy grail, yet investors should not ignore the total return. The last step when using a screen for dividend stocks is to look for value.

 Buying overvalued companies may end up losing an investor’s money even after dividends. For example, if you purchased Intel in 2000, you would not have made your initial investment back, including dividends, because of how low the companies price dropped.

The Intrinsic value of a company can be calculated to find the “true” value of a company. In its most simple form, intrinsic value is the discounted present value of future cash flows and contains many different opinions and variables. Academics and Institutional investors will use Discounted cash flows and Dividend discount models to project future cash flows to come up with a fair value.

While it is helpful to know these techniques, they are a bit overkill for a screener. Sometimes the KISS approach is better.

A price-to-earnings ratio, or P/E ratio, measures a company’s stock price pertaining to its earnings. Generally speaking, if profits are growing, there is a good chance that the price will increase. For a long time, a P/E ratio of 20 was used as a benchmark; however, it may be wise to check the ratio’s PE ratio. Like the payout ratio criteria, select a P/E ratio towards the lower end of the industry average.

Related Read:

19 Blue Chip Stocks For Incredibly Reliable Dividends

Resources

There are a couple of really good screeners available on the market today that are predominately aimed at US companies.

1. Finviz has an excellent screener where you can drill down on Descriptive, Fundamental, and Technical filters.
2. IOcharts.IO –  For a more dividend-focused screener, look no further than IO Charts.

If you prefer to go the manual route, Justin Law over at Drip Investing.org  maintains a dividend champion list for American companies.

The below resources can be found on the web, but I have not personally used any of them

European companies

Unfortunately, European Investors have to work a little harder to find European dividend stocks. Apart from other blogs, one of the only places I have found that can reliably filter European stocks is

1. Yahoo! Finance Screener

Reasons Not to use  dividend stock screeners

Having a resource to help novice investors screen dividend stocks can be helpful, but it should come with a warning. Screeners never tell the whole story and only give a quick overview of companies. Instead, screeners should be used to find watchlists. In addition, before investing in a company, investors should look into a company’s annual reports to understand what the company does to make money.

As investors grow in confidence and gain more knowledge, screeners may no longer be necessary as they will already have a shortlist of companies they want to own.

Of course, if selecting individual companies seems like to much work, you can always turn to someone like  Kanwal Sarai to help you from Simply investing

Related Read:

Simply Investing Report Review

If you would like a copy of the template I use to perform fundamental analysis then feel free to grab your copy below. I explain how I use the template here!

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