4 Secrets To Finding The Best Dividend Stocks

Dividend stocks come in all shapes and sizes. Some are high-yield and low-growth, while others are high-growth and low-yield. There is an endless spectrum of stocks in between those two extremes. The natural inclination is to buy the stock with the highest yield, Sometimes it may be the best stock. Other times the high-yielding stock is the next in line to cut its dividend and/or see its price collapse. So how do find pick and choose between the alternatives to find the best available dividend stock? Here is what I look for when buying a dividend growth stock for my long-term portfolio: Sustainability In this era of ultra-low interest rates, who wouldn't like to earn an 18% yield. An 18% yield would be outstanding! Unfortunately, an 18% yield is not sustainable. Companies simply can not generate enough cash to pay operating expenses, purchase capital, service debt, grow the business and afford to pay an 18% yield over the long-term. Often times when you see an 18% yield quoted, it is not really what it appears to be. When a company does not generate sufficient cash to maintain its dividend, over an extended period of time, but continues to pay the dividend, a portion of the dividend will be classified as a return of capital. A return of capital is the payment of some or all of your investment in the company's stock. A return of capital reduces the basis of your stock. It is not a dividend - it just looks like one. Often the portion that is classified as return of capital is only disclosed at tax time, thus the full payment is used in calculating the dividend yield. Strong Free Cash Flows As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what's behind the numbers. A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. A payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business. Instead of GAAP earnings, I prefer to focus on cash. Free Cash Flow has many definitions, but the one I use is operating cash flow less capital expenditures. Capital expenditures are deducted since you can't run a business for any period of time without expending some level of capital. These two numbers are easily located on the Statement of Cash Flows.123... Read more