The single most powerful ratio is the dividend yield. Investors who want to find the best stocks buys can hardly go wrong by focusing on the highest dividend paying stocks.
But you can improve your performance even more if you utilize the treasure trove of other ratios and methods useful in rooting out excellent companies. You should remember that you do not just want high dividends, but steady and growing dividends as well. You do not just want the highest dividend paying stocks, but the top dividend paying stocks.
Below is a list of helpful characteristics to look for and ratios to calculate to identify the top dividend paying stocks.
- Favor consistent dividend raisers. Great companies do not become lousy companies over night. And lousy companies do not become great companies over night. One of the most effective ways to find companies that will consistently raise their dividend in the future is to simply look at which ones consistently raised their dividends in the past.
- Favor companies that pay a steady dividend. Well-run companies anticipate the future and profit from it. They never raise their dividend so generously that they eventually have to cut it (or even have to cut the rate at which they grow it). Consequently, the best run companies not only consistently raise their dividend, but they do so at a steady rate. The best run companies have low dividend volatility. A steady dividend is a sign of a well-run firm. Favor companies that have low dividend volatility.
- You can (and should) determine the health of the dividend by studying numbers other than the dividend. Perhaps the most important is the return-on-assets (ROA) ratio. The ROA ratio is the single best measure of firm quality available. And firms that have a healthy ROA can have both a high dividend yield and a high plow back ratio.
- The biggest bargains are in small cap stocks, but the biggest rip offs are too. If you are risk-averse, you should favor large cap stocks. Large cap stocks are usually more diversified geographically and in terms of the products they offer. One effective way to safeguard that the dividend is dependable is to favor large cap stocks.
- There are numerous other straightforward and powerful ratios that brilliantly illuminate the financial strength, operating efficiency, growth potential and other aspects of firm value that are critical components in determining if a firm will be able to pay a solid and steadily growing dividend. Do not let any of these go to waste. To see these in greater detail, go to our financial ratios document.
- Visit the best stock research sites. They will provide you critical information on the top dividend paying stocks. None of the above ratios or recommendations is foolproof. For instance, it is possible for many large cap stocks to have a shaky dividend and for many small cap stocks to have a solid dividend. You should become skilled at consolidating these various ratios and statistics into one, comprehensive rating. The best stock research sites can help you do this until you develop this skill on your own.