What Makes A Great Dividend Stock For Dividend Investing?
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Well, that stock also has a 90% payout ratio, and almost no revenue growth or net income growth. And so you look at a business model like that. It’s like, okay, it has a 4% yield, but you’re probably never gonna get any raises in the future. So if you hold that stock for 510 years, you’re probably still going to be getting that 4% dividend yield, okay, which might be fine for some people.
But meanwhile, maybe there was this other stock over here that had a 3% yield and only had you know a 40% payout. ratio and they were able to raise their dividend more and moreover future years. And so that 3% yield over time maybe goes to a 5% from where you bought the stock or maybe a 6% or something like that. And also you’re blowing that 4% yield away guys.
So if you want to judge a great dividend stock for dividend investing, you want to build out a dividend portfolio or just add some dividend stocks to your portfolio. Think about some of these things. I hope this video gave you guys a ton of value.
I think I tried to give away as much information for free on this video as I could possibly give guys so if you really enjoyed it, make sure you smash the thumbs up button. By the way, if you want to know all my favorite stock market apps and websites I use, go ahead and check out that PDF. The link should be in the comments or in the description. All right. Thank you for watching and have a great day.
Today we chat about what makes a great dividend stock for dividend investing in the stock market. Many investors love dividend investing, but very few know what’s important when judging a dividend stock. Today I am here to help you understand what is important when dividend investing. Lets me know in the comments of any dividend stocks to buy now or dividend stocks to watch! Thanks!
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What makes a great dividend stock for dividend investing. That’s what we’re talking about here today, guys, I hope you’re doing great. As always, if you’re new here I am Jeremy and today I want to share with you guys exactly how to judge a stock if it is a great dividend stock to get maximum gains in the future.
Or if this isn’t such a good stock, and there’s a lot of things that newer investors in the market get tied into when it comes to dividend stocks, things they are looking at that I’m telling you some of these things are the wrong things to be looking at.
Sometimes you want to be looking at these other things, guys, so hope you get a ton of value out of today’s video, make sure you smash the thumbs up if you do and share this with somebody that might be interested. And dividend investing. By the way, I get a question a lot on like, what are my favorite stock market apps and websites use on a daily basis.
And so I created a PDF that goes into those top five so make sure you check out that guy’s I’ll probably have it as a pinned comment. I know it will also be linked in the description. You want that free PDF, go ahead and check it out. Okay, so let’s start getting into this.
How do you judge a dividend stock for basically becoming a great dividend stock? Okay, so the first thing most folks look at when they’re thinking about a dividend stock, the first thing they look at is yield meaning what is the dividend yield that stock is giving you? Is it a 2%? Is it a 3%? Is it a 4%? Is it a 5%.
And this is how a lot of investors mainly judge a dividend stock when they’re getting involved. And this is the most overrated thing, when it comes to dividend stocks, whatever the current yield is, for a particular stock out there, whether it’s 2% 3% 4%, it’s the most overrated thing in the world. This is what everybody’s looking at.
And I’m telling you guys, this is not where the game is. I’ve seen so many people chase after high yield dividend stocks, those those stocks, you know, that have a 6% yield, 7% yield, 8% yield, maybe even a 10% yield plus, and they think, Oh my gosh, this stock has paid out so much in dividends in the past, they’re going to continue to in the future and they don’t, okay, and a lot of times.
I’ve seen that where people are chasing these high yielders and they lose actually way more money on the stock depreciating over time the stock price depreciating than what they get in dividends and they’ll hold the stock for several years, they made a bunch of dividend money, but net net they actually lost money because the stock went down more than the actual money they got paid out in dividends, okay.
This is the most overrated thing you can possibly look at when it comes to dividend stocks. And this is a thing that almost all dividend investors are fascinated by when they look into a dividend stock. And I can promise you, it’s the biggest mistake you will make just judging a stock to based upon old this stock pays a 3% yield.
This one pays a 4% yield the 4% yield is better for me, oh, this stock pays a 7% yield this one only a 2% the 7% better, it doesn’t work like that, guys, because when you own dividend stocks, and especially when you’re owning them for several years out.
There’s so much more that goes into it that can determine whether you get future gains on that stock or losses on that stock, whether you get future dividend raises over time, or actually dividend decreases over time. Okay, so yield most overrated thing when it comes to dividend investing.
Okay, past track record history. So essentially, you can use a website such as Yahoo Finance, to go ahead and look at like how much a company paid in dividends in the past, you can look at years and years in the past, okay, and basically look at a company’s past track record for paying dividends.
This is actually pretty relevant. And I love to kind of look at this if you’re looking into a dividend stock. And I think it’s important to look for a few things, okay, you want to look for a company that is not only consistently paying dividends each and every quarter, but is raising those dividends each and every year, you run a really look for those companies that have 10 years, 20 years, 30 years, maybe even 40 years in a row, raise their dividends, okay?
Now, just because a company has a 20 year track record of raising dividends doesn’t mean you’re automatically going to get a dividend raise next year. As a matter of fact, it doesn’t even mean the company has to pay dividend in general. But generally speaking, if a company consistently raises their dividend year in and year out, they’re probably going to continue to do that as long as their business is doing good. Okay.
So I think this is a very important thing, if you’re judging a dividend stock to look at his past history, and are they consistently raising that dividend? Are they consistently paying out that dividend for years and years and years now, okay, very important thing to look at revenue trend.
Also another very important thing to look at when you’re looking at a dividend stock. Remember, we talked about yield, okay, so let us stocks can go high yield dividends, because their business model might actually be shrinking, meaning their revenues are actually going down. So their revenues are going down.
Meanwhile, their stock price also goes down and maybe they kept that dividend. So their yield looks really high. Well, revenue trend that’s going down generally not a stock you want to be involved with, unless you have some pretty strong certainty that that business model is going to turn and they’re going to get back to growth, okay.
But a lot of times when these companies start going negative when it comes to revenues, they continue to have their business shrink and shrink over time. And many times the management teams cannot recover that business model okay. So if you see revenue downtrending generally speaking.
That’s not a positive sign for dividend perspective, because as a business is shrinking, their stock price is probably going to shrink, which means their net income is probably going to shrink. Okay, net income trend. Another very important thing, even more important than the revenue trend, net income means their bottom line, like how much money is a company actually making or losing in a given year or given quarter?
Overall? Okay, this is the most important thing to probably look at when it comes to dividend stocks, because you’re going to be able to tell, is the company becoming more and more profitable over time, or less and less profitable over time? Look at the last five years for company and tell me like, Where’s it at and what the trend is there?
Okay, if a company is consistently having their net income going up and going up, doesn’t mean it will absolutely go up in the future because it could go down. But it means there’s a greater likelihood And on the flip side of net incomes going down and down and down.
It means is probably a trend there, it’s probably continue to get worse, okay? net income is so important because that’s actually the money that at the end of the day, the company is usually paid out to shareholders in the form of dividends, okay?
A portion of that net income is usually what’s paid out to these shareholders for dividends, okay, so this is even more important to look at the trend there than actually the revenue trend. Okay, so now we’re starting to look at some things and we’re starting to get some context on what makes a great dividend stock.
We really want stocks that have revenues going up net incomes going up have track records of consistently paying out dividends and raising those dividends each year. Okay, trailing 12 month P versus forward p also important to look at not just in determining whether stocks undervalued or overvalued.
But you want to see a company that generally has a higher trailing 12 month PE than their forward p, generally, you want to find a company that is supposed to be more profitable in the next 12 months than in the previous 12 months. Those are the type of companies you really want to be involved with.
So you want to look at what the trailing 12 month PE is what the four P is, is a Ford p lower. Okay, so an ideal situation for an average industry out there, let’s say the, the trailing 12 month p on average for the s&p 500. Let’s say 16. Okay, okay, cool. So let’s say the stock has a 16.
Ideally, you want that forward p to be something like a 14 or 13, because that means the company is expected to actually get much more profitable in this upcoming year versus this past year. Okay? If you’re thinking about a dividend stock and making dividend money off of a stock, you want a company that’s going to be more and more profitable in the future.
That’s a good thing for you, because that means they’ll continue to probably pay out that dividend. And they’ll probably continue to raise that dividend each and every year. So very, very important. Balance Sheet balance sheet is way underrated. When it comes to dividends. So many dividend investors don’t even bother to look at the balance sheet.
Okay, this is so important. This is so important. This is a fundamental piece of all judgments on fundamental investing is the balance sheet and dividend investors. A lot of them not all of them, but a lot of dividend investors just disregard the balance sheet.
And I can promise you a balance sheet can get a company into so much trouble if a company is loaded up on debts, okay? They’re loaded up on debt, and they don’t have a lot of cash and investments around, then you’re looking at a company that’s probably going to have to make mass interest payments on that debt over time.
If a company’s making mass interest payments on that debt over time, then how much money do they actually have to pay out to you as a shareholder in the form of dividends? Probably not much right? company’s debt is continuing to climb, and maybe their interest rates are even starting to climb, right?
They’re paying out so much money owed to the banks, and then there’s what’s going to be left over for you at the end of the day. Also, a company with a bad balance sheet is going to get itself into a lot of trouble in a recession scenario, and probably have to cut their dividend completely.
So that stock you bought that had a 3% dividend yield and 4% dividend yield in a recession scenario, they might have to cut that completely. So you get no dividend during a recession. Because if they don’t have much cash around, and they’re paying out debt in order for the businesses to survive, if they’re even have a positive net income.
They’re probably going to need to use every dollar of that just to pay off debt because basically the banks probably won’t be loaning them money during a recession time. So they stick themselves in a really bad scenario. Okay, so if I’m thinking about the most underrated thing, when it comes to dividend investing, it is the balance sheet dividend investors love to just take for granted a balance sheet.
I can promise you always always look at the balance sheet because you will get hurt very bad if you’re not okay, the yield most overrated thing balance sheet most underrated thing when it comes to dividend investing. Okay, next thing up is a management team executive management team very key if you’re buying a company long term investing.
Which generally if you’re dividend investing, you have a dividend portfolio, you’re generally like a long term investor, a value investor or something like that value investing long term investing in dividend investing, they go together so they kind of kind of get worked together and that’s generally what people do.
Okay. So a management team if you’re investing in this company for the next five years, and you want to make more and more dividend money each year, very important that executive team knows what they’re doing is makes the right decisions. So you need to judge a CEO, what’s the CEO done?
Since he got to that company has he made the right decisions or wrong decisions where’s where’s the stock price gone? Since he’s been at that company, where’s the revenue trend gone since he’s been at that company, where’s the net income trended since he’s been at that company, all those things are very, very important to look at that management team.
Because a great management team, they’re probably going to grow that business over time, they’re probably going to protect that business over time. And probably you’re probably gonna make a lot more dividend money in future years, then you will have even in past years guys, management team also another super underrated thing when it comes to dividend investing.
Okay, next thing you want to think about when you’re kind of thinking about, is this a great dividend stock or not a great dividend stock? is for the business model, you want to think about the business model, what products and services does this company sell? Okay?
And what is the opportunity for this business model over future years, super, super important, okay, if a business model is already maxed out, if they already have pretty much as many customers as they can possibly get for their product or service, or their market is shrinking, things like that, that’s bad, okay, that means that’s just a bad bad sign.
You want to buy into business models that have huge opportunity and for themselves, that they can grow market share, or they’re going into markets that are like brand new, and there’s almost like infinity amounts, they can grow into those type of business models in the future, okay, you want to look at that business model opportunity.
Companies with huge business model opportunities are probably going to provide great returns for investors over future years, especially as long as you’re not buying them when they’re overvalued. Okay, these are the type of companies that not only can you probably get a lot of dividend share gains in the future.
But you’ll probably also get a lot of share price gains in those type of stocks as well, because they’ll probably grow the business massively bigger in the future, if they have big opportunities in front of themselves. Think about that business model, what’s the opportunity there? Okay, next thing you want to think about is what is the business model competition.
So in the products and services a company sells, what’s their competition is are there any competitors that are coming in their space that are such serious competitors, that they could really actually damage that company in a massive, massive way, and put their company in a situation where they can’t grow their revenues, they can’t grow, their net income.
Their business is shrinking, their dividends are shrinking, because the competition is too tough, you got to really think about how that business is doing for see the competitors in their space, okay, in the annual report, the 10k of all companies, they list out their competitors, and why their competitors are a risk factor for the company.
Very important. Always look at those risk factors and attend k you by the way, you can go to like Investor Relations page of any company out there. So let’s say you were thinking about investing in I don’t know Nike, right? It was type in Nike Investor Relations, go on their website, click on their 10k, or annual report.
And in that report, they’re gonna have their competitors listed out there, and what the competitive threats are. So super, super important. Because if a company has too much competition, or too big of a competitor come in their space that’s going to eat their lunch, then the business model is going to go down, the stock price is going to go down.
So you’re probably gonna lose money in the stock and guess what else is going to happen? Probably that yield will get cut or not be able to get raised in the future. Okay, all very bad things. So think about the business model competition.
All right. And last thing you also want to consider is payout ratio, e ratio is super, super important for a company. Okay, so let’s say there’s a company that has $1 of EPR. Okay, $1 of earnings per share. And let’s say they pay out dividends each year have essentially 75 cents, okay?
75 cents, they pay out in dividends. This essentially means that this company has a 75% payout ratio, okay, which once again means that they are paying out 75% of their earnings per share of their actually money at the end of the pie out to shareholders, okay, then numbers a bit high.
Personally, I like to try to find payout ratios under 50%. Because this means a company is probably saving away a lot of money or using some of that money for share buybacks or using that money to go ahead and buy other companies or just storing that money on the balance sheet for a rainy day or pay off debt or something like that.
Okay, so I generally like to find companies that have peer ratios under 50%. That means they have a lot of room to raise that dividend in future years, even if the earnings per share were not to go out, okay, if you have a company with a really low payout ratio, even if the earnings per share were flat, they could still raise dividends for years and years to come in the future.
Because the payout ratio is so low companies that payout over 75% are generally companies that aren’t going to raise the dividend much in the future at all, if they even raise it at all in the future. Okay, and so I see a lot of times people get attracted by yield and then like all this stocks, awesome, it has a 4% dividend yield.