How to Find the Best Dividend Stocks

Ali Qamar

Updated: 2 December 2023

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Investing in dividends is undoubtedly a slow but steady way of investing. Interestingly, slow but steady always wins the race.

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Besides, the interest rates are always rising, and bank bonds letting out nothing substantial, and for that reason, stocks that pay dividends are top of the list for investors.

Ideally, dividend-paying stocks have, over time, outperformed those stocks that do not. It looks quite natural, right? – You only find a company paying dividends and then reinvesting the dividends and then build net worth over the years.

However, it’s not as easy as it seems. What is required is a quality name to place your bets on to avoid dividend cuts, stock price depreciation, and dividend elimination. The following are some of the tips to help pick the best dividend stocks:

Consider History

To find the best dividend stocks consider a company that shows a rising history of its dividends over a given time, preferably ten years.

A company that consistently shows a growing commitment of dividends is a reflection of its capital discipline as well as a strategic interest with the shareholders.

Consider a High Yield

The dividend yield is simply the earnings of a company over a year divided by the current stock price. When the price drops, the yield rises. When there’s a high yield, it could mean that there’s financial distress, and hence you should not consider such stock.

Earnings and Cash Flow

Ensure that the stock you end up with is one having a healthy cash flow supporting the dividend payouts.

Some companies may be scraping the bottom to maintain the dividend payouts, but in the future, when earning fall, they may have a bleak.

The companies that are worth considering are those with growing cash flow as well as the earnings. The cash flow is arguably the best indicator to consider, as it can’t be manipulated easily.

Growth is Essential

Also, you should watch out carefully for growth. A stock with a consistent dividend growth means that you can grow your investment significantly with time.

Moreover, the dividend growth of a stock is significant in increasing the value of any investment; hence, you have to consider it.

Diversification

Some folks may be thinking that to achieve diversification; one has to invest in a plethora of companies.

Ensure that you choose companies from different industries of interest so that you can avoid with companies in one sector defeating the diversification principle.

For instance, at least ten industries in your list should make a well-diversified investment, and picking a stock will be the best out of all.

Avoid Living on the Edges

We can agree that the temptation of living on the edges is always there, but you should avoid such companies that only award high dividends or may just announce special dividends. To some extent, they may look appealing, but you should not fall victim.

Always follow the traditional way of investing as well as get a company paying stable dividends with a gradual increase.

The Foundation should be Solid

After all is said and done, ensure you look into what’s fueling the consistent as well as the rising dividend payouts.

A good business foundation of any company should be an aspect that most individuals lookout for a promising future.

If you get a company with no idea of how they raise their cash, you should move on to another.

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The strongest dividend stocks are companies that essentially have more cash than they know what to do with. You want to avoid companies that pay dividends to prop up their stock prices. Look for stocks that are investing heavily in growth and expansion, while also keeping debt down or non-existent.

Those companies essentially have extra money to share with shareholders. That’s a have-your-cake-and-eat-it-too scenario. You get to own a share in a company with sound financials that you believe in over the long-term, and you get paid to own it.

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Final Thought

At the end of it all, you’ll have to consider a stock with a low price, therefore, find the P/E ratio.

Also, it should be a case of either income now or later. Nevertheless, investing in the best dividend stock is one way for any investor to increase the net worth.

How to Find the Best Dividend Stocks

Ali Qamar

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