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How to Find Good Dividend Stocks: 3 Metrics

It’s easy to find plenty of websites willing to share a “top ten” list of good dividend stocks for the year. Yet it’s much harder to find actual useful lessons that will help you in the long term.

good dividend stocks

This frustrates me. Getting a quick tip about one good dividend stock won’t help anyone towards their financial goals.

Sure it feels good temporarily, but relying on new dividend stocks lists every year isn’t a reliable investment strategy.

So instead of give you what you’re looking for, presumably good dividend stocks, I’m going to teach you how to find good dividend stocks with 3 common metrics. I have no doubt this will be far more beneficial for you in the long term.

And it’s the long term that really matters.

Good Dividend Stocks: P/E

Let’s start with the most basic dividend metric. Price to earnings, or P/E ratio.

This ratio is simple to understand when explained correctly. It is the price you are paying for the earnings a company is giving you.

Look at it this way. If you buy a rental property for cash flow, the success of that investment depends on the price you paid for it and the cash flow it gives you.

A property that you paid $200,000 for might be a great deal if you can make $2,500 a month from it, and not such a great deal if you only make $1,500 a month from it. It’s not the dollar amounts, per se, but the ratio of price to earnings.

Buying dividend stocks works the same way. The lower the price to earnings on a company, the better deal you are getting on the company. It’s the simplest measurement of value.

Price to earnings works really well in helping you avoid extremely unfavorable situations. When a company is losing money, that stock will have a negative P/E ratio. You want to avoid negative P/E ratios at all costs because it indicates a company that is in serious trouble.

P/E also helps you avoid stocks that reach “bubble” territory. This is when Wall Street gets so excited about a stock that investors will literally pay anything to have it. A situation like this is so dangerous because the bubble always pops. We see it time and again.

For a good dividend stock, find a P/E less than 25.

Here’s the free tool I use to sort dividend stocks by P/E. It’s called FINVIZ, and it lets you sort from a wide variety of metrics. Simply select P/E: “Under 25” in the “Fundamental” Tab.

Good Dividend Stocks: D/E

The next dividend metric will help you avoid stocks that suddenly go bankrupt like Lehman Brothers did. I’m talking about the Debt to Equity ratio.

Debt to equity ratio works just like anybody’s personal finances. When people end up in bankruptcy court, it’s because they’ve accumulated too much debt on their credit cards, mortgages, and more. For stocks, it works the exact same way.  [click to continue…]

One of the biggest hurdles to stock market investing is a mindset shift. Many beginners can’t get their heads around the reasons to find stocks with dividends. And I don’t blame them.

stocks with dividends

After all, how can you get excited about a $1.15 payment that takes a year to accumulate? While on the surface, a small dividend may seem inconsequential…

I’m afraid that many beginner investors are missing the bigger picture. And as they miss this picture, they miss the most powerful worldly force for building wealth.

What we need is a road map towards making money in the stock market.

I’ll try to explain this in the simplest of terms. I’m hoping you’ll get a “light bulb moment” and it will help you see stocks with dividends in a much different way.

Once you understand the power behind it, you can go out and reap the benefits yourself.

Think of the following examples.

Take the game of Monopoly, for instance. We all know that the goal of the game is to collect as much money as possible. Coincidentally, this is the same goal in investing.

However, you don’t win the game of Monopoly by hoarding cash. You need to instead buy as many properties as you can. Those of you who are good at the game know that a few well placed houses and hotels on your properties will pay you thousands of Monopoly money in the long run.

In Monopoly, it costs money to buy properties and add houses and hotels. These properties don’t pay for themselves right away, yet you know that the key is to snatch up these properties as they will more than pay for themselves in the long term.

You have to look at stocks with dividends in this same way. You’re not buying them for the immediate return, but for the long term cash flows.

Tomatoes and Investing

Another simple example is planting a tomato garden. Let’s examine the goals and the effects. The goal of a tomato garden is for me to eat a tomato. This is obvious.

However, you don’t plant a tomato garden and expect to immediately start eating a tomato, or many tomatoes. You must plant the garden, water it, till it, and do other garden-like things to it (as you can tell, I’m not a green thumb).

But once the tomato plant has sprouted, it takes minimal work to maintain the garden. Plus you get not just one tomato, but an “income stream” of tomatoes. You must have the patience to reap the rewards, but the rewards are much plentiful than just buying a tomato at a store and consuming it.

The difference between buying a tomato to feed you once and a tomato seed to feed you indefinitely is the difference between buying a stock to make money and buying a stock for the dividend.

Notice that the goals are the same. In the tomato scenario, our goal is to eat a tomato. With investing, our goal is to make money. The difference is that you can take a long term approach for delayed gratification and greater benefit, or a short term gratification that quickly evaporates.

What’s interesting about the Monopoly example is that it utilizes a rare force in the world.

Most things in life take a great amount of upkeep and energy. The tomato plant, for example, requires maintenance– not as much effort as the initial plant but still significant. Exercise and our body takes constant effort and energy. I couldn’t possibly hope that one workout would have me “set for life”.

Money has a drain effect. It always seems to find a way to leak out of our wallets. We have to put constant effort and energy to keep an income at our jobs.

Monopoly properties don’t fall victim to this. You just buy it once, and it creates an income for you forever.

Guess what. Dividend paying stocks work the same way!!

Except in the real world, the best stocks with dividends will increase the payouts year after year. What this means is…

As long as you pick a company with strong financials, the income stream will pay you until you or the company dies! And those payments rise, that’s some serious earning power.

Let’s play this out with an example.  [click to continue…]

Stock Spreadsheet Q&A

Many long time readers know about the stock spreadsheet I offer as part of my book package. This is the exact spreadsheet I use when analyzing a company. It’s a simplified tool to help people buy stocks, but even within it there are questions and confusion.

stock spreadsheet

I had a couple of in-depth conversations with some of my readers and customers regarding the questions they had with the Value Trap Indicator Spreadsheet, and if they have these questions chances are many of you do too.

So I’ve included those questions with my answers in this post. Hopefully it will help those of you following along at home. It may just be the trigger you need to find the confidence in using spreadsheets for stocks.

Hi Andrew, I have a question about the seven categories. To calculate the 3 year average growth (category 6) do I use revenue or should I look at net income? And if my VTI is around 350 should I pass on this stock?

For 3 year average growth use net earnings.
A VTI of 350 is close to the strong buy signal of 250, so it’s worth keeping an eye on for a stock price pullback.

So can I use operating income? Or should I subtract interest and taxes?

Use net earnings which can be found on the income statement. Operating income minus interest and taxes won’t give you the same net earnings numbers that most of Wall Street is using (usually).

Do you use google as well to search through the financial statements? Or

I use because it is the definitive source. Not to say that other websites will be inaccurate but I prefer to get my data from the source.

In category 6 of the book you implement the growth. But how do I calculate the 3 year average growth in excel? Because at Finviz it isn’t mentioned. I calculated the 3 year average growth like this: Gemiddelde means average (I am from Belgium). But there is something not right about this formula because the outcome should be negative.

value spreadsheet

Great question. Using your example, you’d take earnings from 2014 – 2013 earnings, 2013 -2012, 2012-2011. Then take the average of this sum (divide the sum by 3). That’d be the average growth.

It gets interesting when negative numbers are involved, because it skews the data. I make the calculations in my spreadsheet, but basically I’ll take growth from the last positive earnings. For ex, to take growth of 2014, I’d subtract from 2012 instead of 2013 since 2013 is negative.  [click to continue…]

One of the most common questions or criticisms I hear from skeptics goes along the lines of:

“If you’re so successful at picking stocks, then why do you share that information to others”

or the usual, “if you’re making so much money, why do you need to sell the information? Why not keep it for yourself?

And it’s a good concern. I know I sure shared this perspective when I started out.

stock market investing

Look, there are scam artists and fakes out there. I’m not going to pretend that they exist. Charlatans thrive in every area of popular interest, and make their money by their ability to create excitement. Usually this excitement leads to reaching for the wallet, with little or no value exchange for the customer.

I don’t by any means support or condone this kind of behavior. It makes me sick to the depths of my stomach. I strongly believe in the power of capitalism, free trade and exchange of goods, but it’s these types of criminals who ruin the image of the system for everyone.

Why am I not a charlatan? Well for one, I practice what I preach. I’m eating my own cooking. Hell, my Roth IRA is composed solely from the stock picks I share to my newsletter subscribers. My financial future is at-risk just as my customers are.

Number two, I take pride in maintaining my integrity. I do what I say and say what I’ll do. I try to live this way not only in my investing life, but also in my regular life. No one’s perfect, but I hold myself to the highest standard.

Of course, those first two statements are nice to hear but they don’t get down to the core of what a customer needs. We need to know if this philosophy works.

Since I’ve been there before, in a position of a clueless beginner, I remember how important it was to me that I get the right stock market investing systems in place. So I took the kind of due diligence that most average investors just aren’t willing to take.

I had a bit of an ego going in– I knew I was getting a good start as a young kid, and I’ve always been extremely gifted in math. I figured that the skillset would carry over into stock market investing. It sure has.

Doing this due diligence meant learning about every kind of major stock market investing strategy. There’s value investing, which I eventually decided upon. But there’s also trend following, growth stock investing, index investing, technical analysis, asset allocation, bond investing, real estate investing, options trading, forex trading, large cap, small cap, international… and so much more.

I know the myriad of options seems endless. And it really is. There’s a million ways to skin a cat. But only until I could grasp the basics from each strategy, and be able to explain it to myself, was I finally confident in sharing about my findings.

A quick observation will show you who has the superior system. In basketball, it’s Phil Jackson and the triangle. In the music biz, it’s Rick Rubin. In the stock market, it’s the students of Graham and Dodd who built fortunes through value investing.

Identifying these masters and learning from them is the best way to accelerate your understanding and mastery of a skill. Plus and perhaps most importantly, the material needs to make sense.

Value investing passes every test, and it’s the only reason I’m so confident to share about it to my readers. The concepts make sense even to the layman. Simplicity is important.

Now for the big question…  [click to continue…]

Beginner Investing Questions Answered

I received the following investing questions from the subscribers to my email list. I know many of you share these common questions, so I’ve included the answers for your benefit here.

investing questions

Investing questions #1: My biggest frustration with investing is getting started in an investment worth investing in. I have thought of investing in the stock market but haven’t yet. Please help.

It’s good that you are selective in wanting to start. When it comes to investing in the stock market, it’s much better to be cautious than to be careless.

Let me try to help you ease your concern. The majority of your investment return will not come from just one investment. A well-diversified portfolio should hold around 20 individual stock positions.

That’s not to say you have to build all 20 at once. As a beginner, it’s completely fine to build one position, and then another one, and then another one as time goes by.

The first investment you make is important in the sense that it helps your confidence. Other than that, the results of this investment will not be substantial in the long term. It will be the consistency of your investing, and the fact that you are adding positions monthly that will compound your wealth and give the results you seek.

When it comes to finding an investment, I highly recommend researching about value investing. A well-diversified portfolio of value stocks tends to outperform the market average if done correctly and with the right principles.

So bottom line, don’t let your frustration cripple you.

A mistake in the beginning with your first couple of investments won’t kill you. The decision to stop investing will.

Investing questions #2: I’m brand spanking new to investing. What frustrates me the most at the moment is my lack of knowledge and a plan of action. Also, I represent two minorities in this area and have no one in my “circle” of friends or family that have the same interests I do. Hopefully you can help me get started.  [click to continue…]

Retirement Planning in Your 20s

I’d like to share this great email I received along with a response back. It’s about retirement planning, and it can be beneficial for those looking to retire early or just obtain a great start financially, especially if you are in your 20s.

retirement planning

Many first-time career workers and recent graduates will find value with this post.

“Your 20s are typically the perfect time to start planning for retirement, but sometimes life gets in the way. What did you do successfully in your 20s, or if you could go back in time, is there anything you would have done differently to ensure a better financial future sooner in life?

I would love to hear your thoughts on how you could’ve built your financial safety net in your 20s better–and how you can start it now if you haven’t already. What would be your ideal retire at 65 plan?”

I’ll start by sharing that I’m not any different from any of you. While I’ll admit I may have more awareness about financial matters than most peers my age, I don’t pretend that my plan is perfect.

In fact, if you take a hard and objective look at my financial plan… you’ll undoubtedly find places where I can be better optimized and more efficient. While processes to optimize work extremely well in the business world, they don’t always translate to real life.

This is important. What I’ve devised for myself works the best for the current situation I’m in, the lifestyle I desire, and the sacrifices and benefits I’m willing to take and keep.

It can change and should evolve as my life and situations evolve as well. This clarity is one that I’d recommend to anyone getting started with retirement planning in their 20’s.

Retirement Planning Motivation

Just do it. A slogan for a popular shoe brand, but also relevant advice for anyone starting out.

Of course, before we dive in we want to see some results to strive for. I’ll share a few that have helped keep me fired up.  [click to continue…]

Celebrity Investors are Smarter than You Think

Did you ever notice how people like to criticize celebrities for how much money they spend?

Take the boxing match that we witnessed last month. It was Mayweather vs. Pacquiao, one of the most anticipated and highest prized fight in the history of the sport. Naturally, this attracted much celebrity fanfare.

Some of the biggest names showed up to watch the fight. Along with this came big ticket prices as well. Once word of the high ticket prices spread, us mere mortals gathered together around the PPV to complain about how much money some celebrities were spending. But was it really that ludicrous?

celebrity investors

An affluent and popular Tom Brady was reported to have spent $128,000+ for his floor side seat to the event. Surely this was a frivolous and stupid money decision even for him?

I beg to differ.

Spending $128,000 on a night of fun isn’t that crazy. Especially when you look at the numbers. You know how much I love the numbers. They never lie.  [click to continue…]

High Dividend Yield– Too Good to be True?

Recently received a great question from a reader about a stock with a high dividend yield.

high dividend yield

Knowing my love of dividends, the answer may surprise you…

“Long time no talk, hope all is well. I’ve been really getting the topic of dividend yield today, and I’m contacting you because I know it’s a favorite topic of yours.

I stumbled upon a company that has a rather large dividend yield, $CGA, of 19%. It currently estimated to be undervalued by 370%. Although, at a current price of $2.10, that could be concerning. It has a jitta score of 3.79, which indicates that it’s not a “wonderful” company.

My question:

Could one really gain from a company like this strictly by investing in it to reap benefits from the dividend yield? At 19%, that might be something to consider, no? The only downside would be if the company decided to decrease its dividend yield and of course it would naturally decrease a bit if the price went up as well.”

If something looks too good to be true, it usually is.

Especially when you see a yield above 10%… it starts to really raise some red flags.

I looked a little bit into the company. It’s based in China, and the market capitalization is under $2 billion, both of which worry me.

When you read the annual report, they state that their earnings are highly dependent on the Chinese government. Regardless of how you feel about the politics behind that, it means putting a lot of faith in a communist government.  [click to continue…]

5 Dividend Investing Success Stories

History can teach us a lot. I’ve shown just how much we can learn from mistakes past with the bankruptcy research, and now I want to flip the script. Let’s examine 5 case studies of the most successful dividend investing stories from the last 2.5 decades.

dividend investing success stories

While we can’t expect to follow these guidelines exactly, the takeaways should help us increase our chances for finding the next dividend investing success.

Even one future successful dividend investment can set up a substantial cash flow for years to come. In fact, research from the world’s largest money manager BlackRock has indicated that dividends and dividend growth have made up 90% of investor returns in the past century.

There’s no doubting the importance of dividends. Yet even the most novice investor can agree that you can’t just throw darts at a wall and hope every stock you buy will continue paying dividends.

Not only does a company need to pay dividends, but increase earnings so those dividend payments can increase. That’s when the real power of compounding kicks in.

I implore you to additionally learn about the components of selecting a good stock after you read this article about dividend success stories. While the dividend component should be there, the promise of future growth and a strong balance sheet remains even more critical.

And you’ll only be able to find a company in such a promising situation if you know how to do fundamental analysis. So get yourself educated if you want to make some real money.

Caveats to the Case Studies

For this dividend case study examination, I took 5 of the most popular dividend growth stocks that have performed exceptionally well.  [click to continue…]

What is dollar cost averaging? Also called the constant dollar plan, it is the technique of investing a fixed amount of money consistently. When purchasing stocks, this allows more shares to be purchased when prices are lower, and less shares when prices are higher.

dollar cost averaging

For example, let’s say you established dollar cost averaging of $400 a month into a manufacturing company. At $25 a share, you’d be able to buy 16 shares the first month. If the price dropped in the second month to $20 a share, you would purchase 20 shares… and so on.

If you can understand that investments rise and fall in value constantly, you can become better prepared to deal with the fluctuations. When dollar cost averaging, you look at a loss in value as a greater buying opportunity, instead of immediately writing off the experience as a loss.

Assuming the price of the investment does eventually rise, a dollar cost averaging plan will help you capitalize on lower market swings by assigning you more shares. It also helps you stay consistent as an investor, which will materialize into superior gains in the long term. [click to continue…]