The major benefit of owning dividend-paying stocks is receiving the income they generate. But not all dividend stocks are equal, some pay very little; others pay way too much and eventually cut or eliminate their dividends. So how do you sift through thousands of stocks to find a bond-like dividend payer?
Who needs dividend income?
Dividends can help provide a regular and reliable stream of payments. You may want to have current income to supplement your other sources of income. Or you may be a retiree who needs and depends on a regular stream of interest and dividend payments to pay for living expenses. Or you might be a young person building a nest egg and want the reduced volatility (and growth!) the dividend stocks can provide. Dividend paying stocks can be a strategic part of your portfolio to help meet economic goals in any stage of life.
What is a Dividend Income Stock?
Simply put, a “Dividend Income Stock” is a stock that pays a dividend above its sector’s average yield. If you’re primarily looking for income, who would want to buy an income stream paying below the average? No one! And, since we are the “Dividend System,” we require that any candidate for investment must have been paying dividends for a minimum of seven-ish years to even be eligible for consideration.
Screening for Dividend Income Stocks
Here are the factors we use when scanning across the “Dividend Universe” to find those life-sustaining income stars:
- Minimum of seven (7) years of continuous dividend increases
- A dividend yield that is above its sector’s average yield
- A three year free cash flow growth rate that is higher than the three year dividend growth rate*
- A five year free cash flow growth rate that is higher than the five year dividend growth rate*
- A total return for both 5-year and 10-year periods that is greater than zero
- A free cash flow dividend coverage ratio above 2.0, using the forward dividend for calculation (our software does the calculation for us, thankfully!)
** Not a single utility can meet this requirement, but they tend to be good dividend payers, so they are exempt from this requirement.
Typically, there are about 750 stocks in our dividend universe. This screen filters out all but about 60, eliminating the 92% of dividend stocks that don’t pass muster.
From the remaining 60 candidate stocks, we rank them by following factors:
- Yield (highest to lowest)
- Forward dividend Free Cash Flow coverage ratio (highest to lowest)
- Number of years of continuous dividend increases (highest to lowest)
- Our DivSafe™ rating of the stock (highest rating to lowest)
The combined ranking number gives us an overall best. We have found that the “extreme best” doesn’t yield** good results. Better to go for an overall best.
Finally, after all is said and done, time being a scarce resource, we eliminate the candidates down to a manageable number for further consideration as time allows, typically 2 to 5 stocks per sector.
** Yes, pun intended.
Voila! You now have a list of March’s Top Dividend Income Stocks!
See the list below. Click on the ticker (enclosed in parenthesis) to see live data on GuruFocus.com. The list is sorted from overall best at the top of each sector.
» (NEU) NewMarket Corp ~ Chemicals
» (KALU) Kaiser Aluminum Corp ~ Metals & Mining
» (IPG) The Interpublic Group of Companies Inc ~ Media – Diversified
» (VZ) Verizon Communications Inc ~ Telecommunication Services
» (BBY) Best Buy Co Inc ~ Retail – Cyclical
» (SON) Sonoco Products Co ~ Packaging & Containers
» (GPC) Genuine Parts Co ~ Retail – Cyclical ♥
» (WHR) Whirlpool Corp ~ Furnishings, Fixtures & Appliances
» (LEG) Leggett & Platt Inc ~ Furnishings, Fixtures & Appliances
» (GIS) General Mills Inc ~ Consumer Packaged Goods
» (CLX) Clorox Co ~ Consumer Packaged Goods
» (KMB) Kimberly-Clark Corp ~ Consumer Packaged Goods
» (CL) Colgate-Palmolive Co ~ Consumer Packaged Goods ♥
» (PG) Procter & Gamble Co ~ Consumer Packaged Goods ♥
» (MCY) Mercury General Corp ~ Insurance
» (DGICA) Donegal Group Inc ~ Insurance
» (SAFT) Safety Insurance Group Inc ~ Insurance
» (AMNB) American National Bankshares Inc ~ Banks
» (ORI) Old Republic International Corp ~ Insurance
» (BMY) Bristol-Myers Squibb Company ~ Drug Manufacturers
» (SNA) Snap-on Inc ~ Industrial Products
» (DOV) Dover Corp ~ Industrial Products
» (HNI) HNI Corp ~ Industrial Products
» (MGRC) McGrath RentCorp ~ Business Services
» (EMR) Emerson Electric Co ~ Industrial Products
» (ADI) Analog Devices Inc ~ Semiconductors
» (INTC) Intel Corp ~ Semiconductors
» (CSGS) CSG Systems International Inc ~ Software
» (DTE) DTE Energy Co ~ Utilities – Regulated
» (PNW) Pinnacle West Capital Corp ~ Utilities – Regulated
» (BKH) Black Hills Corp ~ Utilities – Regulated
» (SO) Southern Co ~ Utilities – Regulated
» (NWN) Northwest Natural Holding Co ~ Utilities – Regulated
Please Note: This information is not an offer to buy stocks, but just a list that has been narrowed down as starting point for your further research. We always recommend further due diligence before making your decision to invest or not.
‘♥’ indicates an all-time, reliable favorite well-suited for most portfolios.