What To Look For In Dividend Paying Stocks - 5 Criteria To Know Before You Buy
Seeking Alpha Analyst Since 2019
"The way to wealth lies in buying and holding stocks in good companies and letting time work for you."
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Summary
- It's a smart idea to familiarize yourself with what dividend stocks are.
- A few key concepts can help you find excellent dividend stocks for your portfolio.
- The way to build wealth is with dividend paying companies like Kellog.
- Some companies like Johnson & Johnson have been paying a growing their dividend for 59 years!
- Steady and slow is the way to go, just look at utility stalwart Southern Company as the benchmark.
>Payout ratio: A stock's payout ratio is the amount of money it pays per share in dividends, divided by its earnings per share. In other words, this tells you what percentage of earnings a stock pays to shareholders. A reasonably low payout ratio (say 60% or less) is a good sign that the dividend is sustainable.
>History of raises: It's a very good sign when a company like (JNJ) raises its dividend year after year, especially when it can continue to do so during recessions and other tough economic times like the COVID-19 pandemic.
>Steady revenue and earnings growth: When looking for the best dividend stocks to own for the long term, prioritize stability in the companies you consider. Erratic revenue (up one year, down the next) and all-over-the-board earnings can be signs of trouble. Steady growth like (SO) provides plenty of income for the future.
>Durable competitive advantages: This is perhaps the most important feature to look for. A durable competitive advantage can come in several forms, such as a proprietary technology, high barriers to entry, high customer switching costs, or a powerful brand name, just to name a few.
>High yield: This is last on the list for a reason. A high yield is obviously preferable to a lower one, but only if the other four criteria are met. A high dividend like Kellogg's (K) 3.82% is only as strong as the business that supports it, so compare dividend yields after you make sure the business is healthy and the payout is stable.
Analyst's Disclosure: I/we have a beneficial short position in the shares of SO either through stock ownership, options, or other derivatives.
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