DIVIDEND STOCK CRITERIA

Dividend Machine is the name I give to stocks that meet four specific criteria including earnings per share (EPS), minimal dividend yield, dividend increases over time, and debt to equity ratio (D/E.)

 

 

 

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 Yield


The most safe investment is suppose to be a U.S. 10 year treasury bond. 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 from a company that I call a dividend machine was three percent in 2011 and now I think we need 3.5%.

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.  In 2011 for a stock to be considered a dividend machine a company must have demonstrated a dividend increase every year since 2007.  Now we want 5 years of four percent increases per year on average.

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.


Model Portfolio holdings are presented in the page named MODEL PORTFOLIOS.



M* MoneyMadam