How To Find The Best Stock For Dividend Income
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How do you find the best stock for dividend income?
Is there a simple way to cut through all the clutter, zero in on what’s really important, and find a high-income dividend stock?
Well, we all know there’s no such thing as the sure thing. Not when it comes to investing. And dividend stocks aren’t any different.
That’s why just about every year one of the S&P Dividend Aristocrats gets the boot and is thrown off the list. Even the top performers stumble.
But when you keep your eye on three essential ingredients – three key indicators that reflect performance – you can pack your portfolio full of great dividend income stocks.
Here’s what to look for, and how to put each one of these key indicators in perspective.
The Best Stock For Dividend Income: Key Indicator #1
You guessed it… the key indicator is income. Don’t take your eyes off the prize. No matter what kind of appealing distractions pop up, maintain a disciplined focus on income.
What kind of income should you look for? Income that’s steady. Income that delivers a profit margin that leaves plenty of money to pay investors a growing dividend.
What kinds of stocks are usually good at paying a high income?
Look at utility stocks, REITs (real estate investment trusts), energy stocks, and financial stocks.
The reason why these industries tend to be home to the best stocks for dividend income… these companies don’t have expensive growing pains. They are usually mature companies. They don’t need to plow a lot of their profits back into expansion, so their income is used to pay investors’ dividends.
REITs are a different animal. By law, REITs need to pay out at least 90% of their annual taxable income in dividends.
The Best Stock For Dividend Income: Key Indicator #2
Look at the safety of the dividend stock. An easy way to measure this: use the beta.
Beta is a number that’s calculated with some pretty complicated arithmetic (like regression analysis).
But you don’t have to worry about calculating the number. You’ll see it displayed in most reports for the stock you’re looking at.
When you see a beta of 1, this means the stock price is expected to rise and fall the same as the overall market.
When the beta is lower than 1, it is less prone to ups and downs. A beta higher than 1 means it’s expected to be more volatile.
For example, if the beta of the dividend stock you’re looking at is 1.1, it’s forecast to be 10% more volatile than the overall market.
Most of the time when you look at the beta, you won’t run into many surprises. For instance, most utility stocks have a beta that’s less than 1. That’s because utility stocks usually aren’t prone to big price swings. But when you find a utility stock with a higher beta, this could be a warning sign. This might not be your best stock for dividend income.
The Best Stock For Dividend Income: Key Indicator #3
It’s always good to look for some growth.
You don’t need a lot of growth; you don’t need to find a stock where the company is on the brink of explosive expansion. You’re not looking for a growth stock, but you are looking for long-term earnings growth.
You want to be sure that your stock will be able to keep earnings growing after it pays the bills. And when your dividend income stock delivers earnings that grow faster than its competitors, you usually see its stock price do better.
How do you find this number?
Look for projected earnings growth estimates. You can find these on reports that collect analysts’ estimates.
Forecasting growth is always tricky. You’re put in a position where you’re challenged to predict the future. A good way to bring some common sense to this process: look backwards before you look forward.
Check out your dividend income stock’s historical earnings growth. This shows you the actual growth rate that’s already happening. This number gives you a solid baseline, a sensible foundation to use so you can reasonably understand what might happen next.
If you’d like to use more historical data and dig even deeper into performance, take a look at sales growth, cash flow growth, and book value growth.
But stick to the three key indicators… income, safety, and growth. Keep an eye on these numbers and you’re on your way.
Why Should You Invest In The Best Stocks For Dividend Income?
There’s nothing like a steady stream of income.
These dividend income stocks are the workhorses of the stock market. They’re the quiet, dependable performers.
You won’t hear about their share prices soaring.
These are the stocks that give you income, safety, and an opportunity for capital appreciation… growth in the actual price of the stock.
Now you know the three key indicators that can lead you to the doorstep of a solid performer.
Use this simple process to find the best stocks for dividend income and upgrade the overall total return of your portfolio.
Category: Dividend Basics
