Dividend stocks help investors generate additional income through their stock holdings which is over and above the capital appreciation that they may get. A regular dividend payout also helps to lower the cost of the acquisition which magnifies the capital gain.
However, it might be a daunting task to select high-quality dividend stocks. So here are a few parameters that I use to filter some of the best such stocks from a universe of over thousands.
Image Source: InvestingPro+
Firstly, we go to the Screener section of InvestingPro+ to start filtering out stocks based on our parameters.
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Market Capitalization - > INR 1,000 crore ($120 million)
The first parameter is to select companies that have a market capitalization of over INR 1,000 crore. This is to weed out very small companies where the future growth trajectory is uncertain. The dividend yield could be very high for such stocks due to a one-time profit which we need to ignore.
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Dividend Yield - >3%
Now comes the actual yield of the stock. The dividend yield is simply the dividend per share (DPS) in the latest financial year (or TTM) divided by the CMP. This represents the totally yearly payout in % terms w.r.t. the CMP.
A 3% yield is good enough to start off with. Any company offering a yield less than this will be removed from our potential portfolio candidates. A very high yield of 10% or so should not be targeted as it can sometimes show not-so-good companies where the yields shoot up due to a massive drop in the share price.
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P/E Ratio -
We also take the valuation of the stock into consideration. An overvalued stock with a good dividend yield should not be selected because the potential for capital loss is much higher than the dividends.
We take a P/E of 50 as the max limit. To some, it might look a bit on the higher side but India is an expensive market that offers high growth potential and therefore it also commands premiums for it.
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3-Year Revenue Growth - >15%
If we are to hold stock for the next 3-5 years, at least, then we need growing companies. A stagnant or declining revenue should totally be avoided despite a high dividend yield. We generally target for at least 15% revenue growth (3-year CAGR) as our benchmark.
Taking 3 years of growth helps to smoothen out fluctuations in a year or two. You can also target for higher growth, but 15% to me seems sufficient.
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Return of Equity (RoE) - > 10%
RoE is a return ratio that measures the financial performance of the company by dividing net income by shareholders’ equity and because the latter is actually the net assets of the company, this ratio is also referred to as the return of net assets.
We look for an RoE of over 10%. You can aim for a higher number.
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Earnings per share (EPS) - >10%
The last parameter is the growing bottom line of the company. The dividends are paid out of profits and if the profits are not growing, how come the payout grow? Hence, we need to make sure, the company is also scaling its net profit and therefore we take EPS growth of over 10% (3-year CAGR).
The reason we take EPS as compared to the net income is that the EPS also accounts for equity dilution (if any) and denotes the net income attributable to the shareholder. It can also happen that the net income increases but the EPS drops due to the issue of more shares. Hence, taking EPS seems better to me than the net income.
Once we put all these parameters in the Screener of InvestingPro+ we arrive at the list of high-quality dividend stocks for the next 3-5 years. These are almost the same criteria that I use for my portfolio.
You can use this tool and make modifications to these above-mentioned parameters to pick the best dividend stocks for the long term.
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This has been covered in my previous webinar on 11 October 2023. You can access the recording here: https://t.co/zc2JJK65DK
Remember, the massive offer of a 65% discount on InvestingPro+ via the coupon code PROW265 is only valid till 25 October 2023. Here's the payment link: https://t.co/XKUqgnDlxf
For any assistance reach me out at aayush.k@investing.com or on X (formerly, Twitter) - aayushxkhanna