Toolbox For Finding The Right Dividend Stocks

Dividend stocks are more popular than ever, despite higher interest rates that were supposed to send them out of favor. Several big dividend ETFs are trading at or near all-time highs, as seen in the price charts for iShares Select Dividend ETF (DVY), SPDR S&P Dividend ETF (SDY), Vanguard Dividend Appreciation ETF (VIG) and WisdomTree Large Cap Dividend (DLN).

DVY Chart

DVY data by YCharts

But investors searching for healthy dividend investments now have their work cut out for them. With slow economic growth and rising rates paid on bonds, such as the 10-year Treasury, it’s increasingly important to pick dividend companies with the strength and commitment to fund dividend growth, not to simply maintain a payout.

YCharts pulls together here a set of charts and screens with metrics useful for evaluating a company’s financial ability to increase a good dividend. Consider this as a checklist of sorts to complement broader investment research into income investments.

The YCharts Stock Screener can find the highest yielding stocks, or point out those within specified parameters, such as yield, sector and size. For individual companies, the most basic dividend information comes from the dividend yield chart, showing the portion of investment returned via dividend payments.

T Dividend Yield (TTM) Chart

T Dividend Yield (TTM) data by YCharts

And from the actual dividend chart, showing the dollar amount per share paid and its basic line of growth (or lack thereof). A stair-stepping line is a good first sign, indicating a steadily raised payout over time.

T Dividend Chart

T Dividend data by YCharts

Most investors understand that the highest yields often come from companies in trouble that may not be able to continue dividend payments for long. There are several metrics to help judge this.

The payout ratio shows the percent of net income paid out as dividends. A spike lasting more than a quarter is a warning sign that the company isn’t making enough money to continue its dividend payments. A payout ratio of more than 100%, like Exelon’s (EXC) reached well before cutting its dividend in February, is an alarm.

EXC Payout Ratio (TTM) Chart

EXC Payout Ratio (TTM) data by YCharts

Similarly, dividend cover shows the ratio of earnings per share to dividends being paid out. It’s an inverse line to the payout ratio. There’s trouble when it falls.

EXC Dividend Cover Chart

EXC Dividend Cover data by YCharts

Neither of those measures are useful, however, if the company has no earnings to relate to dividend payments. Many decent dividend plays involve companies that are restructuring and paying dividends out of cash during the transition. The cash dividend payout ratio comes in handy in these cases, and it works well as an additional check on money-making companies too. (The cash dividend payout ratio can also be expressed as a percent, the common stock dividend payout.) The ratio shows the portion of cash flow, after capital expenditures and preferred dividends payments, that a company uses to make its common stock dividend payments. It’s alarming when it nears 90%, as CenturyLink’s (CTL) before its dividend cut in February.

CTL Common Stock Dividend Payout Ratio (TTM) Chart

CTL Common Stock Dividend Payout Ratio (TTM) data by YCharts

Retention ratio also can help determine the health of a dividend. This is the portion of earnings that the company doesn’t pay out in dividends, also known as retained earnings; aka, what the company retains for things like capital expenditures and debt reductions. J.C. Penney (JCP), in need of money to overhaul its hurting department store chain, greatly boosted its retention ratio by discontinuing its dividend in 2012.

JCP Retention Ratio Chart

JCP Retention Ratio data by YCharts

Investors can use these metrics alongside other data useful for stock picking by plugging in acceptable boundaries into the YCharts Stock Screener. For example, here we set the YCharts Stock Screener to spit out large cap stocks yielding at least 2.5% that have common stock dividend ratios less than 80% and forward price-to-earnings ratio less than 15.

Investors today might want to evaluate the results on each of these charts more critically than they would have in 2008, when a 4% yield beat inflation by a substantial margin for most of the next five years. As interest rates rise, dividend payers will need even more financial strength to keep income investors happy.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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