Dividend Stock Criteria


In this blog I call dividend stocks that meet my selection criteria “DIVIDEND MACHINES.”  Beginning in 2011 I selected stocks each year to create an income portfolio of dividend stocks.   Here are the criteria I use to select a Dividend Machine.

Guidelines for picking Dividend Machines

  • EPS, earnings per share greater than dividend paid out
  • Dividend Yield greater than 2 year U.S. Treasury
  • Consistent Dividend Increases
  • Positive Revenue Trend
  • D/E, debt to equity ratio, less than 1 or within industry standard.


Earnings Per Share


Earnings per share referred to as EPS, is an easy to find value.  For a stock to be considered a Dividend Machine, it must create more EPS than dividend paid out.   This seems simple however sophisticated stock analysts will tell you EPS can be manipulated, and free cash flow is a better measure.   

If you can find free cash flow data on a stock and it surpasses dividends paid out that is a fine measure to you.  If you consider publicly traded REITS (real estate investment trusts) free cash flow is a better measure than EPS because REITS by law must pay out 90% or more of their earnings per share.

You have to decide how much more EPS should be than dividends paid out.  Some argue they want to own a stock that shares the maximum possible to distribute to its shareholders.  Others argue you want a stock to pay out only 50% of their EPS so provide a moat during troubled times.   Both arguments have merit and only you can determine how much EPS should exceed dividends.  

Dividend Yield


Every Dividend Machine must pay a significant dividend.   To be a Dividend Machine, the stock should yield more than the 2 year U.S. Treasury.   Otherwise you may as well ladder U.S. treasuries to create your income portfolio.    

Stock dividends have more risk than U.S. Treasuries and therefore, should pay more yield.  How much yield you need is a complex decision.   Going for very high yields can be a risky proposition.  Each year this hurdle varies.  In 2018 my Dividend Machines sport a yield of 3%.

Dividend Increases


Growth of your income is the second most important part of investing for income.  Just go back 20 years ago and look at your basic expenses, real estate taxes, car or health insurance, food and you will find your expenses have doubled.  Expect them to double again in the next 20 years.  Therefore, your income must double as will and therefore you need your dividends to increase at least at the pace of inflation.   

In 2018, I look for 3-4% annual dividend growth at a minimum.

Positive Revenue Trend


Revenues start the funnel of cash needed to pay dividends.   A Dividend Machine stock should have growing revenues.  On occasion, I have added to a stock that was a Dividend Machine but some fundamental changes reduced the revenue.   A good example is Chevron, symbol, CVX, is a good example.   During periods when oil prices go down, CVX’s revenues may go down. 

This metric has also moved around over the years.  Sometimes I look at recent improvements in revenue to sway my decision whereas other stocks may need to show a longer stretch of revenue increases.  If we want 3-4% dividend growth, then we should seek 3-4 % annual revenue growth.

Debt to Equity Ratio


A pristine balance sheet for any stock you own helps one sleep at night.   D/E ratio (debt to equity ratio) is an easy value to find on any stock you are considering.   Rule of thumb is the lower the debt the safer the investment.   However, some industries require a lot of capital and carry much higher debt levels.

A good value is to find a stock with a D/E ration at 1 or less or for those stocks that require a lot of capital, D/E should be within industry standard. 

Discipline Wins 

A disciplined approach to income investing helps you make decisions when the market is giving you mixed signals.  Notice in 2011, I pick one stock every week for 52 weeks.   Most of those picks have done quite well.  I paid no attention to the overall market and it worked out fine.

Good Income Investing,

M* MoneyMadam