So what makes a good dividend stock? Is it a high yield? Or a history of consecutive dividend increases?
While there’s several things an investor should look for when picking dividend stocks, the search really does not need to be overly complicated in my view. Indeed, one strategy that I like is the simple formula proposed by Lowell Miller, in his excellent dividend investing book The Single Best Investment.
Dividend specialist Miller suggests that when searching for dividend stocks, investors look for three key attributes: high quality, high yield and high growth of yield. It’s a simple, common sense strategy that doesn’t require a CFA charter to execute. Here’s a closer look at the three factors.
For a company to be ‘high quality’, it should have a strong balance sheet, low debt levels and manageable interest payments. It should also have demonstrated consistent revenue and earnings growth over time. Cash flow is important too, because ultimately, cash is needed to pay a dividend.
This is an obvious quality for a dividend stock. The higher the yield, the higher the dividend payouts for the investor.
However, investors should be weary of super high yields, bearing in mind that if it looks too good to be true, it probably is. A super high yield can be a signal from the market that a dividend cut is on the horizon.
High growth of yield
Last, is growth of yield. The best dividend investments are companies that have consistently increased their dividend payouts in the past, and will continue to do so in the future. Look for companies that increase their dividend payouts by at least 5-10% per year. Not only will these companies pay a rising stream of dividends every year, but their stock prices should also rise over time, as their dividend payouts increase.
Of course, this is a very simple dividend stock model, and there’s plenty of ways one could enhance this strategy.
However, next time you’re searching for a good dividend stock, check to see if it has the three qualities of high quality, high yield and high growth of yield. Investing in companies with these three attributes could make a big difference to your investment returns in the long term.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.