Dividend stocks are considered a holy grail in investing. They are perfect for those who want a steady income from their investments. However, these types of stocks can be difficult to identify and trade. You can search for these stocks on many financial websites and your personal broker will also allow you to filter for dividends. There are some key factors to look out for when building a portfolio based on high-dividend stocks. In this article, we will give you the 5 easy steps that you will allow you to easily find and trade these high-dividend stocks that can add a real boost to your portfolio. Use our SwaggyStocks Dividend Screener to find, sort, and filter top quality dividend stocks based on your needs.
1. Identify Industry Health & Profits
The first thing you should look for is the industry health and the profits of the company. The industry health is often left unchecked. However, it is crucial to properly research the industry as this can give you clues as to the long-term viability of a stock. Extreme price plunges and outside factors can have huge influences on a stock. The long-term viability of the industry will be a factor in how resilient the stock is. When choosing a stock, you should keep in mind how fast things can change. You should plan for the years ahead, and look at the trends of the big players.
Additionally, the company should have a recent history of being profitable. You should identify companies that have long-term earnings growth expectations of between 5% and 15%. This filter will rule out many companies, however, it is required to find the most feasible stocks for delivering highly sought after dividends.
2. Look for Strong Cash Flow
Another core aspect to consider is the cash flow of the company. This is the factor that will ultimately pay those dividends. You should ensure that the company has strong cash flow generation. This will showcase the company’s ability to pay regular dividends to its stockholders, and therefore it is a crucial factor. Free cash flow is a metric that allows you to identify the most viable companies for long term dividends. You should stay away from companies with excessive debt to equity ratio. A general guideline is excluding any company which has a ratio above 2.0.
3. Choose Between ETFs or Individual Dividend Stocks
When trading high-dividend stocks you will need to choose between ETFs or individual dividend stocks. There are key differences to both approaches that you will need to understand. An ETF provides exposure to an industry, whereas individual dividend stocks allow you to identify the companies yourself. ETFs are highly diversified and lower the risk due to the high amount of companies involved. The dividend stocks are picked for you, therefore you do not need to do as much research. However, a portfolio of individual dividend stocks gives you more choice and flexibility. It does require more research, however, the rewards are also greater. You can personalize the portfolio to your own specific requirements which are not possible with an ETF.
4. Identify the Payout Ratio
The payout ratio will inform you about the long-term viability of a stock. This percentage is essentially how much a company pays out in dividends. You will usually want a lower number, as this shows safety and stability. Any ratio over 80% should raise red flags, and depending on the industry even a ratio above 50% could signal a warning. A lower ratio means that there is more potential for the dividend to grow in the long term. Therefore, these are the stocks that you should be looking at closely.
5. Choose How Much Stock to Purchase
Lastly, you should properly figure out the correct amount of stock to purchase. You will need to consider your current portfolio, and apply correct risk diversification. It is essential to research the percentages that certain stocks will take in your portfolio. Generally, the riskier the stock the less of a percentage it should take in your portfolio. If you were to find 15 dividend stocks, for example, you could put around 6% of investment in each of these. The specific number may vary depending on the risk of the individual risk. Most brokerage accounts support the identification and purchase of high-dividend stocks. You can buy these individually or through an ETF.
You will now have a much better understanding of how to find and trade on high-dividend stocks that can be a stabilizer in your portfolio. It is essential to do your research and properly look into these key factors that we have identified. This will allow you to pick the stocks the best match your goals, and provide you with a stable and long-term income.
A well put together a portfolio of dividend stocks has the potential for a stable and high yield. However, an ETF offers a fair solution for those who are not well versed to identify their own stocks.