Four
Criteria
Three percent
Dividend Yield
EPS greater than Dividend
Five Years of Dividend
Increases
D/E ratio 1
or less or industry standard.
Finding Dividend Machines
Four Criteria
Three percent
Dividend Yield
EPS greater than Dividend
Five Years of Dividend
Increases
D/E ratio 1
or less or industry standard.
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Dividend Machine is the name I give to companies that
meet four criteria. The criteria are: dividend yield, earnings per share, dividend increases and debt to equity ratio.
Dividend Yield
The most safe investment is
suppose to be a U.S. 10 year treasury bond. This bond pays about two
percent. Investing in stocks is riskier and therefore, any stock
investment should pay me more money than the U.S. 10 year treasury. The
dividend yield I expect out a company that I call a dividend machine is
three percent.
Earnings Per Share
I want to make sure the companies I buy can afford
to continue to pay the dividend. I use earnings per share (EPS) as my measure. If a company makes more money than it pays out
in dividends, then I think it is reasonable to assume that the company will
continue to pay me dividends. The
company's most recent four quarters of EPS and their most recent four
quarters of dividends determine if a company makes the grade as a
dividend machine. EPS must be equal to or greater than the dividend.
Dividend Increases
In
addition to creating more income than I can with a
government bond and in addition to finding a company that makes more
money that it pays me, I want to buy stocks that will increase
my income over time. Cost of living is
guaranteed to double every 20 years. I am old enough to have
experienced this more than once. Therefore, my income needs to double
every 20 years.
A company that has increased dividend income every year since 2007
should continue to increase my income. That
period included the very difficult economic
times of 2008 and the associated stock market crash. To be considered a
dividend machine a company must demonstrate a dividend increase every
year since 2007.
Debt to Equity Ratio
I decided to use debt to equity ratio
(D/E) to determine if a company is financially sound. When a company
has little debt compared to the value of it's business, I feel more
comfortable. For every dollar of equity in a company it should owe no
more than a dollar of debt. This ratio of debt to equity (D/E) is 1.
However, some industries need a lot of debt to operate. I sometimes
include companies in my dividend machine list that have a D/E ratio of
greater than 1 as long as all the companies in that industry have
similar levels of debt.
Summary
These four criteria, when
employed together, have helped me manage my dividend stock portfolio. I
try to use criteria that are easily obtained through Schwab or Yahoo
Finance or MSN Money. When I profile stocks I call dividend machines,
these are the four criteria I use to screen for those companies.
