Let’s walk through a dividend stock screener today. We’ll go through some basics that you should be able to replicate in whichever screener tool you choose. Let me know if you run into any issues and we can look into workarounds.
As mentioned in my previous post, I use stock screeners as a starting point for quantitative analysis. And, since it is so important, it bears repeating here:
Recommended Stock-picking Steps:
A) Quantitative Analysis:
1) Stock Screener (preliminary fundamental and technical criteria) >>> We are here
2) Additional Fundamentals (economics of a business, the balance sheet, the income statement, management and cash flow)
3) Additional Technicals (statistics and patterns generated by market activity like historical pricing and trading volumes)
B) Qualitative Research
1) Company News
2) Company Reports (earnings calls, 10K releases, etc.)
3) Analyst Reports
About Dividend Stocks
A dividend stock is when the company pays a regular dividend to shareholders from earnings after tax and other financial obligations. Dividend Yield is the rate of return that an investor receives as a percentage of the current market price. This yield can be in cash or additional stock, but mostly the former. Typically, it is paid quarterly, but some companies do pay semi-annually or annually. And, some will pay special dividends from time to time as well. Examples of well-known dividend-paying companies: General Electric, Chevron, McDonalds.
Why Invest in Dividend Stocks
While some may argue that income is more important than dividend yield and an investor can create income through capital gains (i.e. selling a stock position for a profit) without needing to worry about dividend yields, I find that have a certain percentage of your stock positions provide consistent and superior dividend yields improves your overall portfolio for the following reasons:
1) They are great for portfolios that are built for income growth – not only do you get a recurring income stream but, as the stock price appreciates, you get an additional return on your investment.
2) Healthy dividend-paying stocks that grow their dividend payout at least 3% annually help cover the average inflation rate (in a lot of cases, this consistent dividend-paying behavior also signifies the continued financial well-being of the company).
3) Dividend-paying stocks tend to be more mature and predictable, thus lowering volatility (typically, investors will hold on to high dividend-paying stocks even in a bear market).
I do not recommend that the stock portion of your portfolio should comprise of dividend stocks alone. There are plenty other pros and cons to dividend stock investing due to different financial schools of thought. We can get into these deeper later, but, some immediate caveats for now:
1) If a company is paying rather high dividends (relative to its peers, say), it may well be due to a declining share value.
2) Sometimes, companies pay high dividends by increasing their debt / leverage (common in communications and banking sectors). Come a downturn, those dividends are the first to get cut.
3) Depending on your tax situation, this particular kind of income may increase your tax burden (unless you’re doing this with tax-deferred or tax-free accounts like IRAs). Either use a dividend calculator or consult a financial expert to understand the impact on your overall financial portfolio.
Onto the Dividend Stock Screener
Let’s get to the screener criteria. See screenshot below. Remember, from my prior post, these criteria are not the be-all, end-all. The goal is to use the screener to narrow down a shortlist of potential candidates for further research. We will get deeper into how to be efficient with this next-level research in another post.
1) Sector – I’ve picked Consumer Staples, but you can pick any. Keep in mind that some sectors are more mature and have a tradition of paying dividends (e.g. Healthcare, Consumer) while some do not (e.g. Technology). Also, be careful about selecting multiple sectors in a single screen as their ratios and metrics could vary significantly.
2) S&P Earnings & Dividends Rank – Standard & Poors measures the historical growth of earnings and dividends. The starting point in the ranking process is a computerized scoring system based on per-share earnings and dividend records over the most recent 10-year period. The system measures growth, stability within the trendline, and cyclicality. From these, scores for earnings and dividends are determined. The system makes allowances for company size, since large companies have certain inherent advantages over smaller ones. Once computed, a final score is measured against a scoring matrix. The results are reviewed and sometimes modified, because no mechanical system can evaluate the many special considerations that could affect a company’s earnings and dividend record. There are 7 grades: A+, A, and A- are above average, B+ is average, B, B-, and C are below average, NR for no ranking, D for company in reorganization. You want above average, of course.
3) Revenue Growth – We want strong historical 5-year growth. Given the 2008 economic crisis, you might want to consider looking at the 3-year trajectory instead. Your call. It is important here to benchmark against the particular sector average, not just the overall market average.
4) Earnings per Share (EPS) Growth – Again, we are looking for strong historical 5-year growth. But, you might consider the 3-year trajectory instead. And, benchmark against the sector average, not the overall market.
5) Price to Earnings Growth (PEG) Ratio – This is to measure how much investors are paying for a stock relative to how quickly the stock is expected to grow. It is calculated by dividing a stock’s forward Price-Earnings (P/E) by its projected three- to five-year annual Earnings per Share (EPS) growth rate. We want companies that are trading at a discount to their projected growth. Generally, the higher the PEG Ratio, the pricier the stock. The universe of searched stocks for PEG will include only stocks with an EPS > 0. I favor PEG Ratio over Price/Earnings (P/E) Ratio because PEG Ratio accounts for both current valuation and future growth. Less than 1 indicates that a stock is trading at a discount to its growth. Greater than 1 indicates a premium. Averages vary sharply by sector, so only use this when looking at a single sector.
6) Dividend Yield – The current annual dividend rate [(latest dividend paid per share X number of times it is paid during the year) / current monthly close price]. This allows us to compare the latest dividend received with the current market value of the share as an indicator of the return earned. I prefer stocks with 3% or greater. How much greater? That depends on the sector – e.g. utilities and real estate can go up as much as 7-8% yields, consumer and industrials tend to stay around 2-4%. Keep in mind that this metric is not an absolute. 2 stocks could both have a 3% dividend yield but entirely different absolute dollar amounts based on their overall stock prices.
7) Dividend Payout % Last Quarter – The % of primary earning per share excluding extraordinary items paid to common stock holders in the form of cash dividends during the last quarter. A high dividend payout number might not be sustainable. Therefore, this criterion can be used to find companies that might be forced to cut their dividend.
So, that’s our initial dividend stock screener. We’re not done, though. We need to take our filter results and do some fundamental quantitative analysis, technical quantitative analysis and, finally, qualitative research. More posts coming up on how to do these efficiently, along with an calculation of total returns for a $10,000 investment in dividend stocks vs non-dividend stocks.
Also, keep in mind that if you are creating a screener for non-dividend stocks, we would select a few different criteria as well. We’ll explore these in later posts too.
Let me know how you get on with this initial screener. If you’re already using stock screeners and investing in dividend stocks, which other criteria do you consider?
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