Welcome to our Dividend Diplomat Stock Screener!
We will list out each metric that we used, why we use it and what the benefits are. This is another part to help show the Wonderful World of Dividend Investing!
Our goal is to each have a portfolio that ultimately covers our monthly expenditures, in order to reach Financial Freedom. We have both spent at least the last 8+ years consistently investing into dividend paying stocks. The Dividend Diplomat Stock Screeners helps us to find and invest into undervalued dividend stocks.
What Dividend Stocks are we purchasing? Well, you can see from our Dividend Portfolios, the list is long. However, especially if you are starting out, there are articles to read to be educated on a few long-term Dividend Stocks that have been around for – what seems like – forever. See our articles below on:
1.) Top 5 Foundation Dividend Stocks
2.) Bert’s 5 Always Buy Stocks
As we are taking each step towards Financial Freedom, there are many ways we are fueling that engine. What other ways are we talking about? We are talking about investing into Fundrise or even using Rakuten (formerly eBates) online, a rebate shopping application.
Each dollar fuels either more dividend income or provides cash back/savings for us, where we can use the funds to purchase Dividend Stocks. Here is our Financial Freedom Products page to see more applications/products we use!
**These products can even help you even save $500, starting… TODAY**
We use a basic dividend stock screener to help identify undervalued dividend growth stocks. We have found it very helpful to have a consistent set of metrics to apply to all stocks. Once a stock passes the screener stage, we begin to roll up the sleeves and perform detailed stock analyses. Our three main Dividend Diplomat Stock Screening metrics are as follows:
Metric #1 P/E Ratio Less than the S&P 500
Price to Earnings is well documented as a quick metric to identify stocks that may potentially be undervalued. We use this to identify stocks that may be discounted compared to the overall stock market. The S&P P/E ratio is currently above 20X on any given day. So we set our screener at a PE of <15 to identify stocks that offer a pretty decent discount from the market. This is not the only way we use PE though. You also need industry comparisons to unlock further value of the metric. Once a stock is identified, we compare the stock’s PE to their competitors to provide an apples to apples comparison. The <15 metric just helps me identify the companies.
Metric #2 Payout Ratio of Less than 60%
Can a business sustain a business model that uses all, the majority or EVEN MORE THAN that of their earnings to pay shareholders a dividend? We do not believe so. There is a healthy balance of rewarding shareholders and reinvesting profits in the company.
Through research, reading article, reading books, etc., we believe a Payout Ratio of <60% is a healthy ratio that will allow a company to sustain its current dividend. An Example is Johnson & Johnson (JNJ): if they pay a $3.80 dividend on $9.00 of earnings, that represents a payout ratio of 42%. Further, we wrote a deeper article below.
We love finding companies that have payout ratios well below our 60% benchmark. This shows the company has a lot of room to grow their dividend in future periods. If you pair a low payout ratio with a healthy dividend yield (3-5%), we begin to salivate at the prospects of a future large dividend increase. Conversely, if a dividend ratio spikes above 60%, the stock’s current dividend growth may slow or in some cases, the dividend may be in trouble for reasons mentioned at the beginning of the section.
Here is a REAL LIFE example of how trouble happened. In 2014, Lanny successfully identified a future dividend-cut in FirstEnergy‘s (FE) dividend earlier in that year using this metric from our stock screener. How? Their dividend payout ratio at the time of the stock screener was over 100%. Within weeks, the company announced a drastic dividend cut, that slashed our forward dividend income, since we both owned shares of FE at that time. Lesson learned.
Metric #3 Increasing Dividends
It is important for our portfolios to invest in stocks that continue to grow their dividend. If a company’s dividend is stagnant, the yield has the potential to decrease if the stock suddenly has a period of strong price appreciation. In addition, increasing dividends is a signal of strong financial performance by the company. Why? More dollars become available to shareholders!
Lastly, who doesn’t love an investment that historically raises their return to shareholders? It provides a nice little increase to their annual income. Ideally, we would like to see a company grow their dividend at a rate greater than inflation to avoid losing purchasing power on future dollars. However, the growth rate greater than inflation is not the end all be all for us as we own several stocks in our portfolios (T) that do not follow this.
Examples of Applying the dividend Stock Screener:
The following are links to articles in which we have applied the stock screener to various companies. For a few, the application of the screener has helped sway us to initiate a position in the company. We have also written several stock analyses on the website Seeking Alpha. So if you are looking for other examples for our Dividend Stock Screener in action, please check out some of the articles we have written on their website.