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In previous "Dividend Quick Picks And Lists" articles such as this recent piece that I had published, I have had some readers asking how I screen for new opportunities, and in other cases, also how I research dividend companies. Therefore, I have decided to devote two articles to finding and identifying the stocks; and researching about the identified stocks. Without further ado, here is the entire process of how I find new dividend stocks I have never seen before:

Finding Stocks

1. Refer To The CCC List

The first step that I take to scale down the list of stocks that I will consider is to solely pick stocks from David Fish's CCC list, which stands for Dividend Champions, Contenders and Challengers. The list, which is updated at the end of every month by Seeking Alpha contributor David Fish, can be found here. For those unfamiliar with this must-have utility for all dividend investor, Dividend Champions are companies that have increased their dividends for 25 consecutive years or more, while Contenders are companies that have increased dividends between 10 and 24 consecutive years, and Challengers are companies that have increased their dividends between five and nine consecutive years.

I make it a point to only own stocks that are included in this list, with a past record of increasing dividends. Only owning stocks that have a history of increasing dividends (with no freezes in between) is really one of my bedrock principles when I invest in dividend stocks. Dividend growth is the only way that I can ensure that my dividend compounding machine continues churning quietly in the background, as companies produce larger and larger paychecks to my portfolio.

Therefore, this principle means that I only accept stocks that has increased their dividends for at least five consecutive years (which essentially means everything in the CCC list). With these stocks in hand, let us move on to the next step.

2i. Finviz Screener

I copy and paste the entire list of CCC stocks into the "tickers" area of the Finviz screener, as shown in the picture below (annotated by a circle). The picture also shows an example of a screen that one can use. But one can always alter the numbers directly to his needs.

(click to enlarge)

Here, one can screen for the many metrics that I care about, including dividend yields, EPS Growth, Payout Ratios, Valuations, ROE (Return On Equity) metrics and even the market capitalization of the companies. Here is why I feel that these metrics are this important, and my optimal numbers for these metrics.

Dividend Yields

I would normally like this number to be above 2%. This number ensures that I get a sizable starting dividend income. One could buy a company yielding 0.5% at the moment and even though it may have fast-paced dividend growth, it would still take a considerable amount of time for the compounding machine to grow that position. Besides this, a company paying such a low dividend is simply sending a message to me- that it is not entirely devoted to creating shareholder value through dividends.

EPS Growth

Earnings, being the mother milk of all dividends, is considered very highly by me. Without earnings growth, dividends most likely would not grow either. Thus, I would always prefer to see a steadily increasing EPS figure. Although this is the case, I do not require my holdings to experience explosive double-digit earnings growth, being a dividend investor after all. Although this is the case, I would always like to see a 5-year EPS growth rate in the 3-5% range or higher, which is rather reasonable even for dividend growth stalwarts I like, such as General Mills (NYSE:GIS), Wal-Mart Stores (NYSE:WMT), Coca-Cola (NYSE:KO), Exxon Mobil (NYSE:XOM) and Colgate-Palmolive (NYSE:CL).

Payout Ratio

I also take payout ratios into consideration, and I would not accept companies with payout ratios north of 90%, no matter whether it is based on EPS or FFO. A payout ratio above 90% would signal both the danger of a company's dividend growth, especially if the company runs into cash flow problems during recessions; and also the danger of adversely impacting a company's growth due to the fact that too much of its funds are being paid to shareholders, and not being reinvested into the company.

The bottom line is, I do not want to buy stocks, however attractive, that do not pay dividends in moderation.

Valuation

I also consider valuations when screening for suitable additions to my portfolio, or even for candidates for research. I normally will not buy a company which is priced over 20 times EPS. But I normally screen for stocks with P/E ratios of below 25 on Finviz. I want to give concessions to certain great companies with charges on their lists, and other such one-time reductions to EPS.

In terms of valuations, I also want to ensure is that I do not buy companies that are too far above their fair P/E value, which I determine through finding out at sites like YCharts.

Market Cap

I would also like companies to have a market capitalization of over $2 Billion, as this ensures the general stability of the companies, as it has been proven that larger companies, which are more established, are generally less volatile than smaller counterparts.

2ii. Drawbacks Of This Screener- What You Have To Do Yourself

Dividend Growth Rates

One pitfall of using this screener is that there is no direct way that one can screen for a company's dividend growth rate. As dividend growth is one of the most important metrics dividend investors like me, this is one crucial step that us dividend investors have to do ourselves. What I suggest is creating a list of potential stocks, then screening it yourself, using David Fish's CCC list to find out a company's dividend growth rates.

A word about dividend growth rates: Dividend Growth Rates are one of the most important metrics that I consider before buying any dividend stocks. This growth ensures that my portfolio and the growth of my capital outpaces the rate of inflation, and that my portfolio smoothly compounds over time.

Cannot Switch To FFO

In addition, the Finviz Screener cannot switch its P/E ratios to P/FFO ratios. Therefore, the dividend investor should not be utilizing the Finviz screener to screen for MLPs or REITs. The appropriate valuation measure that should be used for these two classes of stocks is P/FFO, and for the dividend payout ratio, it should be Dividend/FFO instead of Dividend/EPS.

For example, as shown here, Kinder Morgan Energy Partners (NYSE:KMP) has a P/E ratio of 39.27 and a payout ratio of 156%, while in reality, its appropriate valuation metric, the P/FFO ratio only reads 8.2, and its payout ratio (on FFO) is only in the range of 50%. This shows another pitfall of the screener, when it comes to MLPs and REITs.

Conclusion

Although this way of screening has some drawbacks, this screen should already produce an adequate number of stocks that can allow us to move into the next step of going into more detail. Do stay tuned for my next article, Part 2: Going Into The Details.

Source: Researching Dividend Stocks: Part 1 - Identifying The Stocks