Here is what to look for when buying dividend stocks – 4 metrics.
This is for new investors or those who want to start investing in individual stocks.
Selecting a dividend stock can seem like a daunting task.
For many are just too many numbers, ratios, and metrics when looking at a stock. It often confuses the minds of new and prospective investors.
I find that simple is better.
Do not get overwhelmed with ratios and metrics that it causes you not to act.
The most important move you can make is starting!
And the sooner you invest the better.
Do not over complicate it.
With that, there are 4 basic metrics I look at when buying a dividend stock.
4 Basic Metrics That I Look At:
1) Dividend Payout Ratio!
Preferably a payout ratio of less than 60%. Below 60% shows a company has room to grow its dividend over the years. There are exceptions like REIT stocks which are required to pay out 90% of their earnings.
2) P/E Ratio (price-to-earnings)!
Basically, this can tell you if a stock is undervalued or overvalued. While I tend to make exceptions to this preference, stocks with a P/E ratio of less than 20 is a good general preference.
3) Dividend Yield!
I prefer to purchase stocks that yield over 3%. Again, I will make exceptions to this preference at times if the stock is quality.
4) Dividend Growth History!
How many years has a company paid out an increasing dividend? 5 years? 10 years? 20 years? Increasing dividends often signal strong performance for companies.
Of course, remember that nothing is 100% guaranteed in the future.
Aristocrats, Kings, and More!
In addition, be sure to check out a group of stocks known as Dividend Aristocrats. These are dividend stocks that have raised their dividend payments each year for 25 years and more.
And if you like that, check out a list of Dividend Kings. These are dividend stocks that have raised their dividend payments each year for 50 years and more!
If you are interested in learning more about dividends and personal finance, especially a beginner, I created a page called “Getting Started”.
I list some resources there to help you get a basic start to dividends and personal finance. These are resources that helped me get started many years ago.
Conclusion
And there is what to look for when buying dividend stocks – 4 metrics!
There is no such thing as a perfect company or sector. All have certain problems.
Most of the time it comes down to ignoring the noise (irrational fear) and acting. The sooner you start, then better.
And that is also why it is most important to remember to diversify your portfolio.
Never put all your money in a single stock. Spread your money across multiple stocks across multiple sectors.
This way if one stock or sector runs into trouble, you have plenty others to pick up the slack.
Best of luck on your investing journey!
What do you think of the post? What metrics do you look for when selecting a dividend stock? Let me know in the comments below!
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