I’m neither an expert stock trader or a stock trading professional but I have been investing in individual dividend paying stocks for as long as I can remember. When I first purchased ING Canada (now called Intact Financial), I wasn’t aware the power of dividend income. It wasn’t until a few years later I realized how great dividend income is. Why do I like dividend stocks so much? Because we receive paycheck from these dividend stocks regularly. Once the initial purchase is made, I really don’t have to do any work to get paid; the dividends just keep rolling in. Even better, many of these stocks will increase their dividend payout each year like clockwork so our dividend income is protected from inflation. How do you start investing in dividend paying stocks? As luck have it, I have written an easy to understand step-by-step guide on how to start investing in dividend paying stocks.
Typically there are two ways to make money with stocks.
- Price appreciation. This is where your sale price is higher than the purchase price.
- Dividends. Regular cash payments from the company.
The two aren’t mutually exclusive. You can certainly make money by having price appreciation and receiving dividends. For example, if you were to buy Royal Bank in Feb 2009, you would be looking at a large amount of price appreciation and dividend payment.
Why Invest in Dividend Stocks
Many people purchase stocks for price speculation. Wouldn’t it great to find a 10 bagger stock? Imagine purchasing Alphabet (GOOGL) when it first went IPO or purchasing Teck Resources (TECK.B) at end of Dec 2015 when it was around $5.50 (now around $32). Unfortunately, finding these multi-bagger stocks is extremely difficult. It is simply too difficult for the average investors to predict whether company will continue growing or not. Imagine purchasing Twitter and Groupon when they went IPO thinking these stocks were multi-baggers in a couple of years. Think again!
Dividend stocks on the other hand are easier to predict. Companies that pay out consistent dividends usually are well-established and have demonstrated good financial health. Instead of retain and invest the earnings, these companies pay out a portion of their earnings (i.e. dividends) regularly to their shareholders. This is a way for company to demonstrate that it is performing well and rewarding the shareholders.
As an investor, the predictable income is great. You are awarded for holding the stock in form of the regular dividend payment. Furthermore, if the company performs well, both the stock price and dividends will increase. It’s a win-win situation for you.
How to Start Investing in Dividend Paying Stocks
Thanks to the internet, it is relatively easy to start investing in dividend stocks. While there are thousands and thousands of dividend paying stocks that you can invest in, there are many resources that can help you finding potential stocks to invest in.
Source #1 – Check out what stocks ETFs and mutual funds are holding
Take a look at some of the ETFs and mutual funds and find out which dividend paying stocks they are holding in their top 10-20 holdings. If we look at Vanguard Canadian High Dividend Yield Index ETF (VDY.TO), the ETF has Royal Bank, TD, Bank of Nova Scotia, Bank of Montreal, Enbridge, TransCanada Corp, Manulife, CIBC, Sun Life, and Potash as the top 10 holdings. If we look at Vanguard US Dividend Appreciation Index ETF (VIG), the ETF has Microsoft, Johnson & Johnson, PepsiCo, Coca-Cola, McDonald’s, 3M, Medtronic, United Technologies, Walgreens, and CVS Health as the top 10 holdings. Getting these 20 stocks will allow you to get started with your stock research and analysis.
Source #2 Dividend Aristocrats
Dividend aristocrats are dividend stocks that have a consistent and long streak of dividend payment and increased dividend payout for 25 consecutive years. These stocks are typically more stable and considered as blue-chip stocks. Therefore, it is a great idea to have some dividend aristocrats in your dividend portfolio.
Source #3 Dividend Champions/All-Stars
While owning dividend aristocrats is great due to the consistent dividend increase, wouldn’t it be nice to find a dividend paying stock with uber high dividend growth rate with the potential to be the next dividend aristocrat in a few years? This is where you may want to look into dividend champions and all-stars. You can find a list of dividend champions/all-star on The DRIP Investing Resource Center. To be more country specific:
- US Dividend Champions
- Canadian Dividend All-Star List
Source #4 Top Canadian Dividend Stocks
I have picked out 10 top Canadian dividend stocks and best Canadian monthly dividend stocks that I think any Canadian dividend investor should hold in their portfolio. All of these dividend stocks have long dividend increase streak and pay out stable dividends. If you’re looking for stable dividend paying stocks, it might also be worthwhile to consider some of the best Canadian utility stocks.
It’s a good idea to have a core holding of 10-15 individual dividend stocks across the different sectors for diversification purposes.
How to Analyze Dividend Paying Stocks
Step 1: Shorten the List
When I have a list of dividend stocks, the first step is to create a shorter list before doing a deeper analysis of each stock. To quickly reduce the list I run a few selection parameters.
- PE ratio less than 20.
- Dividend yield is more than 2.5%
- Payout ratio is less than 75%
- 5 Year Growth Rate greater than 5%
For example, imagine we started with the 20 stocks that we found from Resource #1.
|Name||Ticker||Price||PE Ratio||Dividend Yield||Payout Ratio||Streak||5 Year Growth Rate|
|Bank of Nova Scotia||BNS.TO||77.71||13.47||3.81%||51.3%||6||7%|
|Bank of Montreal||BMO.TO||98.82||14.28||3.56%||50.9%||5||4%|
|Johnson & Johnson||JNJ||113.91||19.97||2.81%||56.0%||54||7%|
Next we would eliminate stocks from the list that do not meet the selection criteria mentioned above.
These 4 selection parameters would reduce the list from 20 stocks down to 7.
|Name||Ticker||Price||PE Ratio||Dividend Yield||Payout Ratio||Streak||5 Year Growth Rate|
|Bank of Nova Scotia||BNS.TO||77.71||13.47||3.81||51.3%||6||7|
|Johnson & Johnson||JNJ||113.91||19.97||2.81||56.0%||54||7|
Step 2: Further Reduction
Narrowing down the list from 20 stocks down to 7 is a good start. But we only started with 20. What if we started with 100 dividend stocks and we only managed to reduce down to 20?
Let’s see if we can do further reduction of our list. Here are a few parameters that will help reducing the list further.
- Return on Equity: over 10%
- Sales Growth past 5 years: positive
- EPS Growth past 5 years: positive
- EPS Growth next 5 years: positive
To do such analysis, you can look up the stock information on financial websites like Yahoo Finance, Morningstar, Finviz, or Simple Wall St.
Let’s take a closer look at Royal Bank (RY.TO)
We can see that Royal Bank meets these selection criteria.
Running through these parameters on the 7 stocks on our list and it will eliminate Manulife (ROE is 7.7%, Sales growth past 5 years is negative).
Step 3: More Research
The final step is to do more research on the remaining stocks on the list. Some items you might want to check out.
- Quarterly and annual financial reports: You can find these reports on the company website. The reports give you a good idea how the company has been performing, where the company is heading to, and if there are any special projects in the future. In case you’re wondering, I’ve written a guide on how to read these complicated quarterly and annual reports.
- Dividend Growth History: How many years has the company raised its dividend payout? Has the company ever cut or freeze dividend in the past? If so, what were the circumstances? If a company stopped dividend payment in the past after a period of high dividend growth and now has aggressive dividend growth rate again, you may want to pay special attention.
- Earning History. Actual vs. Analysts estimates: I like to take a look at the earning actual vs. analysts estimates because if the company consistently beats the estimates, this usually means more stock price appreciation over time.
- PEG Ratio: If two companies have the same PE ratio, which one is better? This is when you want to look at the PEG ratio and see what the future growth might hold for the company. The lower the PEG ratio, the better. I always get excited if I can find a dividend paying stock with a PEG ratio below 1.
- Intrinsic value based on future cash flows: This gives you an idea if the stock price is undervalued, overvalued, or about right. This parameter can help you decide whether to buy the stock now or wait.
Great Research Tool: Simply Wall St
In the past when it comes to more research on a particular stock I used various financial websites. Lately I have been using Simply Wall St for further stock research.
Why do I love Simple Wall St? Because it provides a quick visual representation of how a company is currently positioned. When you look up a stock, Simple Wall St provides something called a snowflake to show you how a company is currently valued.
The snowflake changes color (green, yellow, red) and shape based on each company’s strength or weakness in the different categories. The categories are: Value, Future Performance, Past Performance, Financial Health, and Dividend Income. Like mentioned, the snowflake gives you a very quick overview if you should spend more time analyzing the stock-of-interest.
For example if you are interested in Mondelez International (MDLZ), the snowflake will provide a quick warning sign that it might not be the best time to invest in MDLZ right now.
When you scroll down the company page, you can get even more information within each of the five categories (from Royal Bank analysis page).
Overall, I have found Simply Wall St very easy to use and has sped up my stock analysis process.
Simply Wall St – Cool Features
I briefly mentioned 3 various ways to find potential dividend stocks. What I forgot to mention is that Simply Wall St has a cool feature called Investing Ideas where you can find different categories. My favorites have to be Dividend Rock Stars, Top Dividend Payers, and Undervalued Dividend Payers. By exploring these different categories I have been able to find attractive dividend paying stocks for further research.
If you want, you can also use the advanced filter to find stocks that might suite your searching criteria.
In all, I think Simply Wall St is a great tool for dividend growth investor like myself. It has allowed me to get a quick overview of a stock that I might be interested in. If you’re interested, you can sign up a free version to try and explore. If you find it helpful, you can then upgrade to the premium version.
Tracking Your Dividend Portfolio & Income
If you are looking for a way to track your dividend portfolio and income, look no further than my step-by-step guide on how to create a dividend portfolio spreadsheet. Call me old fashioned, I like to use spreadsheet where I can tweak and track my portfolio rather than relying on some online tools that has access to all my financial information.
It’s really easy to start investing in dividend paying stocks and become a DIY investor. Generating a list of dividend stocks and analyzing them can be a lot of fun (if you’re crazy like me ha!). During the process you also get to learn more about each company and determine whether it makes sense to invest your money or not. Certainly make sure you ask yourself these 3 questions before investing.
Investing is an art. You are always learning, you can never be a true master.
Below are some great resources for dividend growth investors.
- Long Run Data: A cool site to calculate return
- Robert Allan Schwartz’s dividend growth company information web site: compound annual growth rate for each dividend company.
- Value Ratio for Canadian Stocks
- Seeking Alpha Dividends: Great dividend stock analysis
Happy investing everyone!