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.
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…]