Topic: Dividend Stocks

Here’s how to make finding dividend stocks easier

July 19, 2017|by Scott Clayton

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When finding dividend stocks, look at these key factors

By finding dividend stocks to hold in your portfolio, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Good dividend stocks are a valuable component of any sound investment portfolio. But note, though, that when it comes to investment safety, a long history of steady dividends is more important than a high current dividend yield.

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Financial factors to look at when finding dividend stocks

As we mentioned above, dividend history is very important to dividend growth stocks. Ideally, you should look for dividend growth stocks that have been paying dividends for 5 or more years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

What is the dividend growth stock’s debt load like? Would it have a hard time recovering from an economic downturn? The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

Some economic sectors are more volatile than others when finding dividend stocks

Speaking very generally, stocks in the Resources sector and the Manufacturing sector are apt to expose you to above-average volatility, while those in the Canadian Finance and Utilities sectors involve below-average volatility. Shares of many finance-sector firms have been unusually volatile in the past few years, because their industry is changing and expanding. Again, however, profits of companies in Canadian Finance and Utilities tend to be more stable than profits in Resources or Manufacturing companies.

Consumer sector stocks are apt to fall in the middle, between the more volatile Resources and Manufacturing companies and more stable Finance and Utilities companies.

When finding dividend stocks, realize that the best will have hidden assets

When researching the best dividend stocks, also take a close look at the balance sheet. Can you spot any hidden assets?

For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet.

You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

What to know about a “Dividend capture” strategy while finding dividend stocks to buy

“Dividend capture” is the trading technique of buying dividend stocks just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid for it, you have “captured” the dividend at no cost, other than the transaction costs.

To do this, you would buy shares in a stock just before the ex-dividend date, so you would be a shareholder of record on the record date, and would receive the dividend. Because the stock theoretically falls by the amount of the dividend on the ex-dividend date, the strategy then calls for you to wait for the stock to move back to the price where you bought it before the ex-dividend date. At this point, you aim to sell the stock for a break-even trade.

Although there can be value to some investors in this strategy, you have to pay a brokerage commission to buy the shares, and a commission to sell. The commissions can eat up much of the dividend income, or even exceed the dividend income. Unfortunately, the individual investor doesn’t have much chance of making a significant profit.

Finding dividend stocks: The biggest risk with the best long-term dividend stocks

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Above all, for a true measure of stability, focus on stocks that have a high dividend yield that they have maintained or raised with their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

Have you ever tried using a dividend capture strategy? Have you found dividend stocks with hidden assets?