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3 Tips to Select your next Dividend Stock

 

Below are 3 key Tips to select a Dividend Stock for your Portfolio.  Please note this list is not exhaustive and there are other factors to be considered of all stocks in general.

 

  1. Look at the sustainability of the dividend not just the gross amount.  One key metric used is the payout ratio which is the dividends paid divided by the net income.  Personally I prefer to use the Operating income versus the Net Income, but either will do to get a rough sense on whether dividends are sustainable or not.[1]  A healthy payout ratio is widely considered to be less than 55 percent, and an unsustainable payout ratio is close to and or above 100 percent.

  2. Consider how often the company increases dividends.  Look for companies that have a long track record of increasing dividends on an annual basis.  Several websites and publications provide Dividend Aristocrat lists.  A Dividend Aristocrat is a company that has raised dividends for 25 consecutive years or more.

  3. Check the health of industry, and look for macroeconomic, regulatory, and political headwinds.  For example, Canadian Oil companies (some of which pay dividends) have suffered greatly over the past 5 years due to explosion of Shale Oil in the United States, and the corresponding flood of supply which has acted to suppress global Oil prices.  Domestically there have also been regulatory and political headwinds to build the necessary pipelines to export Oil and Gas outside North America, due mostly to environmental concerns.  While larger Oil companies have done relatively well through this period, mid-size and small Oil companies who have smaller cash reserves have not.  

 

 

 

[1] To understand the difference between Operating Cash Flow and Net Income please refer to the following article:

https://www.investopedia.com/ask/answers/012915/what-difference-between-operating-cash-flow-and-net-income.asp

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