When you ask most people how they choose what to invest in, the majority of people would say they either work with a financial advisor or they have a trusted family member who handles their investments.
Earlier this week I did a quick informal survey of colleagues by asking what criteria they use to make their investments. I was surprised how few people go the DIY route of investing (dividend stocks, indexing or both).
The process for finding individual companies to invest in can seem overwhelming, confusing and time confusing – not to mention risky. The obvious flipside of this is the rewards of owning blue chip dividend stocks that have a proven record of increasing their annual dividends, which is a great way to balance out inflation.
I wrote earlier how I prefer to use the Google Finance stock screener. It’s free, easy to use and you can add up to 12 different search criteria to find what you really want.
There are other good stock screeners out there like TMX stock screener but they essentially produce the same result – a small list of quality companies.
Globe Investor has an advanced stock screener that some prefer to use but at this point I’m not willing to pay for something I can get for free on Google.
Whatever stock screener you use, the main goal should be to quickly narrow down the list of companies to a select few that you’d want to invest in.
Once you’ve decided what stock screener you want to use, the most important part is choosing which search criteria to use.
Different investors will have different search criteria. For example, a dividend investor after high yield stocks will search for stocks with a dividend yield of 7% or higher, while an investor looking for small cap stocks might focus on companies that are in the bottom 25% of market cap.
I am looking for companies that pay a healthy dividend but are also able to grow their business over the long run. Here are a few of the search criteria I used to come up with some quality stocks (in 5 minutes or less):
- Earnings per share (EPS). I searched for companies that have positive earnings per share (which eliminated many companies right off the bat).
- 10 year EPS growth rate. I chose this because I wanted to find companies that have a solid track record of not only profits but also earnings per share.
- 5 year net income growth rate. I chose this because I wanted to find companies that have been profitable in the past 5 years and are able to grow their businesses.
- Dividend yield. I chose to search for companies that have a yield between 3-6%.
- Dividends per share (and earnings per share). I chose this because it will allow me to easily calculate the dividend payout ratio (see below).
- Beta. This measures a stock’s risk in relation to the overall market. I chose to focus on companies that are on the lower end of the beta bell curve (shown on the Google stock screener).
- Dividend payout ratio. This ratio shows the percentage of earnings that are paid out as dividends. Too high of a ratio (over 100%) means it might be unsustainable in the long term and could potentially be a red flag. To calculate this I took all the data from the stock screener and pasted it into an excel spreadsheet, then divided the dividends per share by the earnings per share to get a percentage. My results had companies with a payout ratio as low as 21% (Melcor Developments) and as high as 658% (Dream Office REIT).
Choosing the Stocks
Once I had the list narrowed down to about 30 companies that met the criteria I set above, I officially added these to my ‘watch list’ of companies I plan on eventually buying when their valuations become attractive. The search using the stock screener took about 5 minutes, and from there I’ll have a list of companies to look into.
Of course I plan on doing some further research like industry comparison, average volumes and market cap.
Most importantly, I also plan on taking a closer look at the dividend history (also readily available on Google). I prefer to invest in companies that have a long track record of consistently paying a dividend. I also prefer to find companies that have a track record of increasing their dividends yet keeping a reasonable payout ratio.
In case you’re wondering here are a few of the names that came up during my search of companies that met the search criteria:
- Canadian Apartment Properties REIT
- National Bank of Canada
- Royal Bank of Canada
- TD Canada Trust
- Bank of Nova Scotia
- Bank of Montreal
- Fortis Inc
- Emera Inc
- Canadian REIT
- TransCanada Corp.
- Boardwalk REIT
The list above doesn’t include them all, and if you’re interested to find out which companies make the cut click here to create your own search criteria.
What criteria do you use to find quality dividend stocks?