It’s always interesting when I start looking for good stocks that will generate income through a regular dividend. I did the exercise today when looking for some good dividend stocks in the S&P500 index. There are many ways to do this but in my opinion, what you are looking for is:
#1-Stock that pays a high dividend yield (obviously)
#2-Stock that is growing its dividend or at least keeping it stable
#3-Stock that has decent earnings and should be able to keep up its dividend payments
There are of course many other factors that could be used but in my opinion, those are the most important ones.
To start off, here are the top 40 stocks in terms of dividend yield in the S&P 500:
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The next step required looking at growth in dividends. A company that has diminished its dividend payment in recent times is generally more inclined to do so again. So I was looking to take out companies that recently declined their dividends. That took out 7-8 names.
This brings us to the final step, determining if the company is liketlyy to be able to pay this dividend in the medium term. The way I do this is to compare the earnings of the company to the dividend yield. For example, if a company pays out a 5% dividend yield but only makes 2.5% (of its price) in earnings, then that is not sustainable.
But if a company makes 2$ per share of earnings and pays out half of that amount in dividends, it is more logical to expect the dividend to remain intact. Doing that exercise, here are the 8 names that came out on top:
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As you can see, all of these names have a dividend yield over 5%, all but one have seen dividend increases in recent months and all are making more money thaan they are paying off. From there, it becomes more subjective and I might want to stay away from some names. For example, some might not like investing in AT&T because of its many problems and high level of competition. Other might want to avoid pharmaceuticals (Eli Lilly & Co)… But in my opinion, all of these are top 2010 dividend stock picks. Any thoughts?