How to Choose Dividend Stocks

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I gave my thoughts to Kyle Woodley for a recent article he wrote for US News and World Reports. Here is an excerpt:

Dividend stocks are the bedrock for any long-term portfolio. That’s not news. If you’ve spent 30 minutes on any financial media website or Investing 101 primer, someone somewhere has assuredly told you that a portion of your investments should be spent collecting stock dividends.

The rub is this: In a market with literally thousands of stocks paying out dividends … well, where in the heck do you even begin?

Charles Sizemore, a portfolio manager on Covestor and chief investment officer at Sizemore Capital Management, a registered investment advisor in Dallas, points out four things investors should do when seeking out stock dividends:

  1. Look for companies that are recession-resistant and have stable cash flows.
  2. Look for consistent dividend growth.
  3. Look for a high yield, but not excessively high.
  4. Watch the payout ratio.

So, what signs of quality are you looking for? It depends on who you ask.

Sizemore says to look at the dividend history. “Did they cut their dividend during the last recession?” he asks. “As a rule of thumb, I say that a company that survived 2008 with its dividend intact is likely to keep that dividend intact through the next crisis, too.”

Keep it growing. While it’s far from a bad thing for a dividend stock to maintain its payout over a long period, many professionals agree that dividend growth is a much better sign for any company paying dividends.

Besides, you want your dividend to keep up with inflation, don’t you? “You want companies that raise their dividends every year, or at least close to every year,” Sizemore says. “Otherwise your stock is essentially a risky bond and nothing more.”

Photo credit: 401(K) 2012

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