5 things I look for in dividend stocks
With thousands of dividend stocks to choose from, what are some of the criteria I look at to help narrow down my search? Here are the 5 things I look for when evaluating possible dividend stocks to buy.
1) International diversification
As someone who lives outside the US, it’s important to me that the companies I invest in don't just earn revenue from their home country.
Being able walk into a McDonald's or Starbucks in nearly any country on earth means that their revenue is more diversified than an alternative that only serves one of two markets.
You can find Clorox wipes or Proctor & Gamble detergent or Coca-Cola soda in most supermarkets internationally.
These are the kinds of strong brands I want to invest in.
2) Commitment to the dividend
I want to see commitment not just to paying the dividend, but also to increasing it.
Coca-Cola started paying its dividend in 1920. That’s 102 years ago covering the Great Depression (1929), WWII, Black Monday (1987), the 2008 financial crisis & Covid.
They’ve been increasing their dividend every year since 1963. Imagine getting an ever-increasing dividend amount for 59 years, and counting!
While nothing is guaranteed, I’m pretty sure no CEO wants to be responsible for ending that legacy.
3) Dividend growth
Not all dividend growth is equal.
Walmart (WMT) has been increasing their dividend for 49 consecutive years.
However since 2013, their increase has been 4c per year. An investor would have received $1.88 per share in 2013 and $2.24 per share in 2022, a 19% increase.
Compare this to Pepsi (PEP), which has also increased dividends for 49 years.
Their dividend has nearly doubled in the same time period from $2.28 per share in 2013 to $4.30 in 2022, an 89% increase.
4) Dividend safety
Dividends come from earnings, and I want to make sure a company makes enough profit to cover their dividend.
Exxon Mobil (XOM) earned $3.36 per share in 2019, but their dividend was $3.43 per share. They had to find ways to make up the difference, maybe via debt.
In the same year, Clorox (CLX) earned $6.42 per share, but only paid $3.84 per share in dividends.
This provides not only some buffer in tough years, but also more room to raise the dividend in future years.
5) The basics!
Of course it goes without saying the company should be sound financially. That means I want to see growing revenues & profits.
I don't want to worry about whether the company is profitable year-on-year.
I'll check their financials (and all the previous points) once a year, just to make sure nothing has changed.
This is a highly simplified look at dividend stocks, I am aware there are other metrics like looking at free cash flow, the chowder rule etc.
My goal is to provide a starting point for you to think about what criteria may be important to you, not to present a comprehensive checklist.
Do not take financial advise from a random loaf on the internet!