Investment Jungle

Before I begin analyzing dividend paying stocks, I would like to develop a screen that will allow the ‘cream of the crop’ dividend payers to rise to the top.

One simple way would be to simply use the list provided by Mergent Dividend Achievers. This site offers a list of the cream of the crop dividend paying stocks. For the Mergent Broad Dividend Achievers Index, the requirements for inclusion are

To become eligible for inclusion in the Index, a company must be incorporated
in the United States or its territories, trade on the NYSE, NASDAQ or AMEX,
and have increased its annual regular dividend payments for the last 10 or more
consecutive years. In addition, Mergent requires that a stock’s average daily
cash volume exceed $500,000 per day in Nov. and Dec. prior to reconstitution.

For the Mergent Canadian Dividend Achievers Index, the requirements for inclusion are

To become eligible for inclusion in the Canadian Dividend Achievers
Index, a company must be incorporated in Canada, trade on a major Canadian
exchange, and have increased its annual regular dividend payments for the last
Number of five or more consecutive years.

This is definitely a good start. But I want to understand the fundamentals of what makes up a quality dividend paying stock. Having read Selecting Stocks by Michael Kaye, there is a whole chapter devoted to screening for dividend paying stocks.

Characteristics of a Quality Dividend Paying Stock:

1. Determine the historical dividend growth rate. You would like to see a long history of increasing dividends.

2. Strong cash flow growth rate. It takes cash to pay out dividends. Finding a company with a solid cash flow growth rate may help predict a company that will be able to raise its dividend payments in the future.

3. Dividend Coverage Ratio. This ratio is the trailing 12 month operating cash flow per share divided by the current annual dividend.

If the dividend coverage ratio is less than 1.0, then the dividend is in jeopardy. You want to see this number above 1.0 and the higher the better.

4. Dividend Payout Ratio. You want to ensure that the company is not spending all its available cash to pay out the dividend.

Other factors to consider:

Another factor to look at is to consider how the dividend yield compares to its current index. For example, the S&P 500 Index currently has a dividend yield of 1.89%. The Dow Jones 30 Index has a dividend yield of 2.26%. The S&P/TSX Composite Index has a dividend yield of 2.35%. I would think that you would want a stock to have a dividend yield greater than its current index. Otherwise, why not just invest in the index for the greater dividend yield?

Another factor to look at is the stock’s average dividend yield. Historically, the stock has bounced between a high dividend yield and a low dividend yield. At the high dividend yield, investor’s have shown themselves to be motivated to purchase the stock since they have not allowed the dividend yield to climb any higher. Similarly, investor’s are not willing to push the low dividend yield past a certain point. The dividend yield will operate within this boundary.

It make sense to calculate this dividend yield boundary as it shows the potential buying and selling points for the stock.

Next Up:

I will develop my screen based on the characteristics described above and then I will proceed to analyze these stocks.

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