Finding solid dividend-paying stocks is an important part of DRIP investing. Many investors feel that the higher the dividend the better. However, the growth and sustainability of that dividend is important as well. In fact, I feel that the sustainability of the dividend is the most important factor to consider for those seeking a quality dividend-paying stock for the long-term. To get a good feel for the sustainability of a company’s dividend, you need to consider the company’s dividend history as well as its payout ratio.
A company’s dividend history is fairly straightforward. I like to look for companies that have increased their dividend each year during the preceding five years. A company’s payout ratio is also straightforward in that it tells you what percentage of the company’s free cash flow is being paid to shareholders in the form of a dividend. For example, if a company reports free cash flow per share of $1 and pays a $0.25 per share dividend, its payout ratio would be 25%. All else being equal, lower payout ratios indicate that a company is more capable of sustaining, and growing, its dividend going forward.
So, a company’s current dividend yield is important, but its ability, and willingness, to continue to grow that dividend over time is equally, if not more, important. The Dividend-a-Month Club, as I refer to it, seeks to identify dividend-paying stocks for each month of the year. By investing in a variety of stocks which pay dividends at different intervals, you can create a dividend portfolio in which you get paid dividends each month of the year.
Each month, I will identify the top 5 stocks, which typically pays a dividend during that particular month, in order of preference based on three factors: 1) Dividend yield, 2) Dividend growth history and 3) Dividend payout ratio. I give a higher weighting to the company’s dividend payout ratio. Each stock must also be offered as part of the First Share Program for DRIP investors. The following is the list for September.
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