Welcome to part three of the series on the best dividend paying stocks. In Part-1, we covered what a dividend is and where it comes from. In Part-2, we covered the investing risk spectrum, diversification, and the benefits of owning dividend paying stocks. Please go back and check them out if you need more background on dividends.
In Part-3 of the series on how to find the best dividend paying stocks, we’re going to get into the details of how you’ll be able to pick the needles out of the haystack.
Let’s get started!!
Where to Start
There are currently 3,291 stocks on the US stock exchanges that pay dividends out of a total of 26,843 stocks listed (according to Google Finance – Stock Screener). Now, the trick is to identify the handful that will be the best dividend paying stocks for years to come. We need some sort of way to parse through these 3,291 stocks to find those real gems. This is where value investing can help us.
Value Investing – Benjamin Graham
Let’s start with the father of value investing, and teacher to none other than Warren Buffett, Benjamin Graham. In his book The Intelligent Investor, Graham develops a concept of identifying under-priced stocks (with relation to their intrinsic value) known as value investing. You can follow some of the links if you’re interested in learning more of Graham’s background or his books.
By finding and picking these under-priced stocks, we can afford ourselves a greater margin of safety when investing. We’ll use Graham’s strategy to help us pick the best dividend paying stocks out there with a good margin of safety.
Picking the Best Dividend Paying Stocks
To pick our best dividend paying stocks, we’ll use Google Finance’s Stock Screener and apply some of the concepts that Graham teaches. Many things have changed over the past 80 years, but many of his rules of thumb still apply today with a couple of minor tweaks.
There are several key things that Graham taught his students to look for when identifying the absolute best dividend paying stocks (defensive stocks). Most of these settings in blue below come directly from his book The Intelligent Investor. In no particular order, these are:
- Market Capitalization – the total value of the company in the stock market. In the Google stock screener, start with setting this at $500 million (500M).
- P/E Ratio – the price to earnings ratio of the stock. Start with a max value of 15 in the screener.
- Price to Book Ratio – this is the stock price divided by the book value per share. The book value per share is the total net assets of the company divided by the number of shares. Start with a max of 1.5 in the screener.
- Current Ratio – this is the current assets of the company (cash) divided by the current liabilities (all debts, accounts payable, etc. due in less than a year). This measures how well the company can pay its short term bills. Start with a min of 2.
- Long Term Debt to Assets % – this is the long term debt divided by the net current assets. Set this with a max of 100%.
- Dividend Yield – the percent return you can expect each year in dividend payments (based on the most recent dividend paid). Start with a min value of 0.5 since we are looking for dividend paying stocks.
- 10 Years EPS Growth Rate – this is the percentage change in earnings per share over the past 10 years. Set this at a min of 33%.
- Uninterrupted Dividends – there should have been uninterrupted dividend payments over the past several years. You should eyeball the past 20 years on the stock chart to ensure dividends have always been paid. Do this by bringing up the symbol, clicking the 5 year graph, and scrolling back for 20 years.
Best Dividend Paying Stocks – The Screened Results
If you’ve been following along, then your Google Finance Stock Screener criteria should look like this:
So, how many stocks are left after applying all of this stringent criteria that Graham suggests? ONLY ONE!!!!!! The lucky company is Compania de Minas Buenaventura SA (symbol BVN).
Why Are You Wasting My Time?
Alright, I know what you’re thinking: “Derek… I’ve spent the past 20 minutes reading part-1, part-2, and now part-3 of your best dividend paying stocks guide – what the hell is going on and where are you taking me if this whole process only spit out one potential pick?”
I’ll tell you what’s going on! With all-time stock market highs in the US, there are not that many good deals to be had currently on well established dividend paying companies. The P/E ratios and price to book ratios are much higher than historical averages. In addition, the 10 year EPS growth has been thrown off by the recent market downturn (10y EPS growth rates are lower). If we’re itching to purchase the best dividend paying stocks right now, we have two general options:
- loosen our criteria a bit from what Graham suggests in select areas and accept that we’re not getting the best deals – i.e. a reduced margin of safety.
- wait for better deals to come our way.
Loosen Criteria – Still Find Great Dividend Paying Stocks
I’ll assume that you’re interested in making some smart stock purchases now with an eye to pick up deals if the market (or a particular stock) softens. By relaxing some of the guidelines that Graham set out for us, I was able to come up with a list of ~20 potential companies. This was shortened further by checking to verify that the company has been consistently paying dividends for at least the past 10 years. It all depends on how far you want to veer away from Graham’s advice and how much margin of safety you’re willing to give up.
The Short List
Here’s the short list of the best dividend paying stocks I came up with by taking Graham’s criteria and loosening it a bit across the board (sorted by market cap):
- CNOOC Limited (ADR) – CEO – An investment holding company specializing in crude oil and natural gas.
- Goldcorp Inc – GG – A gold producing company.
- ENSCO PLC – ESV – A provider of offshore contract drilling services for oil and gas.
- Newmont Mining Corp – NEM – A gold producing company.
- Reliance Steel & Aluminum – RS – A metals service center company.
- Regal-Beloit Corporation – RBC – A manufacturer of electric motors/generators and controls
- Compania da Minas Buenaventura SA (ADR) – BVN – A gold and silver mining company.
- OfficeMax Inc – OMX – Business-to-business and retail office products distribution. (They did suspend their dividend for ~4 years during the market crash, so I hesitate to include this one…)
- CDI Corp. – CDI – An integrated engineering and technology services company.
Going through the exercise of creating this post was great fun for me. I came up with a short list of potential dividend paying stocks that I need to investigate further to see if they would make good potential purchases. I’m confident that one or two of these really will make the best dividend paying stocks out there at this point in time.
You can benefit by using this type of analysis to frequently scan the stock market to easily identify some real over-sold stocks that will make real winners in the long run. Additionally, if you’ve had your eye on a dividend paying stock you can evaluate it using the criteria above to see just how much margin of safety you may be giving up if you purchase it. This method of analysis is really one of the best ways to quickly and easily identify the best dividend paying stocks for your portfolio! Give it a shot!