Investing in dividend stocks is an effective investment strategy for several reasons. First, collecting a steady dividend payment on a regular basis can help provide investors with a reliable source of income to meet expenses. And if investors reinvest their dividends, they can build wealth slowly due to the benefit of compounding.
However, there are thousands of dividend stocks, ETFs and mutual funds to choose from. That’s why we’re offering this screener that allows investors to sort through dividend stocks based on criteria you select. For example, if you only want to see large cap dividend stocks that pay a yield of over 3%, you can do that. Similarly, you can even look for stocks in a specific sector or industry.
In this article, we’ll help provide investors with a basic understanding of how to make the most efficient use of this dividend screener.
Understanding Market Capitalization
Market capitalization (or market cap) is a measure of the market value of a publicly traded company’s outstanding shares. Typically investors hear about large cap, mid cap, or small cap stocks. However, in recent years market capitalizations are becoming more specific and now include mega cap, micro cap, and nano cap. The formula for calculating market cap is the company’s share price multiplied by the number of shares outstanding. In general, companies with larger market caps have more diversified businesses and their share price tends to be less volatile. Because of this slower growth, they are more likely to offer shareholders a dividend.
Selecting a Sector and Industry
Dividend-paying companies come from many different industries. And many times, investors care more about factors like dividend yield and payout ratio than a company’s particular sector. However, there are times when specific sectors or industries present investors with exceptional growth opportunities. Plus, certain investors only want to look at stocks in specific areas such as utilities, technology, or materials. Sector categories are broader and more general while the industry category is narrower and more specific.
Consensus Rating and Upside
Many dividend investors rely on the opinion of analysts. The dividend screener allows investors to select only those dividend stocks that have a certain rating (buy, strong buy, hold, etc.). The consensus upside is a way to fine-tune the screener even more. You can choose to see stocks that analysts expect to go up or down by a certain percentage.
Additionally, you can input your own consensus price target and/or current price for a stock. So if you were looking only for stocks that were under $100, you could set the screener to show you stocks with a current price of less than $100.
While this can be a useful screening tool, it’s important to know that the more specific you are, the fewer options you’ll have. That may be good if you’re looking for a dividend stock that meets well-defined objectives. But it may be too limiting for some investors.
Dividend Yield vs. Payout Ratio
A company’s dividend yield is a measure of how much money per share a company pays out as a dividend. The yield is expressed as a percentage. The formula for dividend yield is:
Annual dividend per share/price per share
For example, a company with a share price of $100 that pays a $5 dividend per share has a dividend yield of 5%.
5/100 = .05 (5%)
However, for the purpose of using the dividend screener, it’s not important that you know how to calculate dividend yield. It does that for you. What you need to understand is that when it comes to dividend yield higher is not always better. A strong dividend yield in one sector may be weak in another. And since a rising or falling share price affects dividend yield, it is a less reliable measure.
A better metric for many investors is the payout ratio. A dividend payout (or annual dividend per share) is the amount an investor will receive in the form of a dividend on a per share basis. So in our example above, if a company pays out $5 per share on an annual basis, an investor who owns $100 shares of the stock will receive $500 a year in dividend payments.
The Importance of Dividend Growth
The best dividend stocks are ones that have a long history of not only continuing to pay a dividend but also to grow that dividend. Many financial websites will calculate a company’s three-year dividend growth. Like dividend yield, this is a statistic that is best to be compared against other stocks in the same sector or with similar attributes (i.e. market cap). Sometimes a company grows its dividend strongly in one year, but that turns out to be unsustainable. In these cases, a company may be forced to cut its dividend which can scare away investors.
The majority of dividend-paying companies issue dividends on a quarterly basis. However, some companies issue dividends on a monthly basis. In many cases, these are companies such as real estate investment trusts (REITs) or master limited partnerships (MLPs) with a business model that requires that they pay out a significant amount of their earnings as a dividend. These companies may be an appealing option for investors who are dependent on a steady stream of regular income.
Every investor is encouraged to buy low and sell high. One way to ensure that investors are buying shares when they have a better chance of increasing is to buy when a stock is near its 52-week low. Of course, this is no guarantee that the stock will rebound or when it will do so. Nevertheless, it can be an important data point for investors who want to ensure they’re not overpaying for a stock.