How to Choose Dividend Stocks for Beginners

The first time I received a dividend, I didn’t know what it was. I just logged into my account to see how my portfolio was doing and saw a notification that I received $4.56 due to a dividend payment. I remember thinking, “Where did this come from?”

It was a pleasant surprise since I didn’t know what dividends were when I first started investing. Once I figured out that some companies paid dividends, I naturally wanted to know how to get more of them! 

I researched what dividends were, and then I learned how to find stocks that offered dividends and learned how to choose the best ones amongst the herd. 

Four criteria in choosing dividend stocks include comparing yield, payout ratios, company debt, and historical performance.

In the following paragraphs, I’ll explain each of those four in detail, and I’ll give you a bonus tip to find dividend stocks that have a proven track record. Think of it as a shortcut for those that don’t want to analyze stocks all day.

What Are Dividends?

Simply put, a dividend is a portion of a company’s earnings that a company pays out to its shareholders. 

Most companies that offer dividends do so on a quarterly basis but there are some that offer them less frequently as well.

Why would a company do this? 

When companies are public, they rely on the shareholders to provide capital used in their business. To reward shareholders for owning shares, a dividend is issued, which allows the shareholder to partake in some of the earned revenue during the period they owned shares.

Dividends are attractive to shareholders because they provide income without having to sell any of the assets that are invested. They can also be seen as evidence of profitability because dividends are always issued from revenue, meaning the company is making money. 

You need to make money to share it with others, right?

Are Dividend Stocks a Good Investment?

If a company is paying an investor a dividend out of its earnings, it’s definitely not a bad thing!

Dividends are usually a sign that a company is well established. Startup companies have a lot of pressure to grow rapidly and are generally trying to profit from underneath a ton of startup debt.

In order to pay a dividend, a company must make money and have a positive cash flow.

Although I could go on and on with this question, I think this is best left for my article that discusses why you should invest in dividends.

How to Find Stocks that Pay Dividends

There are a few ways to find dividend-paying stocks. I’m going to show you the ways that I’ve found all of the dividend stocks that I invest in.

How to Find Dividends in Your Brokerage Account

Most brokerages have the ability to browse and filter stocks to help you locate your next stock acquisition. 

I like to use Webull for this because it’s my favorite brokerage for researching stocks on my phone, which is where I do the bulk of my research.

Dividend Yield is defined as the Dividend Payout Per Share divided by the Stock Price. In Coca-Cola’s case, if the stock price was $42 per share and they paid out a total of $1.40 dividend, it would be $1.40/$42 or roughly 3%.

In Webull, I can go to their “Markets Section” and select Explore. Next, there is already a section labeled High Dividend Stocks, which is used to sort all dividend stocks from the highest to lowest Dividend Yield.

I don’t like using a High Dividend Filter by itself because high dividends can actually be a terrible thing also if you aren’t paying attention. After all, this is how the top three high dividend stocks from that list performed over the past few years:

Yikes! Those high dividend stocks are getting destroyed in thle Market. I’ll explain why in a few minutes…

If you are interested in Webull, checkout our in-depth-review and get 2 free stocks for signing up and making your first deposit!

How to Find Dividends Online

I think the best place to find dividends online is by looking at a popular dividend exchange-traded fund (ETF). You can do this by researching an ETF and looking at its holdings. Vanguard offers some of the best ETFs, in my opinion.

You know what? I’m going to make it easy on you. See for yourself what Vanguard Dividend Appreciation ETF (VIG) is holding here. Now you don’t have to go searching.

Another ETF that I like is the Vanguard High Dividend Yield (VYM) which you can see a list of their holdings as well hereOpens in a new tab..

How to Choose Dividends Stocks with 4 Simple Criteria

So, I mentioned earlier that I don’t like choosing Dividend Stocks by focusing only on Yield. That’s because Yield can be the result of a couple of things.

First, it can mean that the company is legitimately offering a high dividend, which would be good. The second reason can be because the share price is dropping a lot, and the yield is rising because the dividend payout is higher based on poor performance.

The picture above is a great example of that. 

I want to help you avoid making that mistake and show you how to reduce your risk in looking for these dividend stocks with four simple metrics to monitor, which are Yield, Pay-Out Ratio, Debts to Equity Ratio, and Historical Performance

Is this a perfect solution? Of course not!

There’s no way to avoid all risk and make money. This is my opinion. I think it’s a pretty good way to screen out that garbage and find some gems. Let me know in the comments if you agree or disagree!

Comparing Yields

Yield is the ratio of dividend payout per individual share price.

If a company offers a $0.65 dividend payout and the share price is $13 per share, then the dividend would be 0.65/13 or 5%. Dividend yields are based on the annual distribution, so if a company pays dividends quarterly, that 65 cents would be split among the 4 quarters (about 16 cents per quarter).

Looking at how dividend yields compare across several companies is one way to screen investments. It would help if you looked for yields that are higher than current interest rates so that you are outpacing inflation. 

A good range to look for is 4-6%, but depending on your timeline and individual investing style, you may choose dividend rates lower or higher than this.

Where to Find It? You can find the Yield on Yahoo Finance or some Brokerage Tools. On Yahoo Finance, look under the Statistics Tab.

Let’s compare 3 companies!

I?ve chosen JP Morgan Chase & Co (JPM), Johnson & Johnson (JNJ), and Proctor and Gamble Co (PG) because they were the first three names in the VYM ETF.

CompanyInvestment AmountDividend AmountYield

Winner: JP Morgan

Using Pay-Out Ratio to Determine Future Risk

This one requires a little more work to find. The Payout Ratio is the Dividend Per Share divided by Earnings Per Share.

This can be a good metric in determining how risky the dividend payout is in relation to how much the company makes. 

A lower Payout Ratio is better because it shows that a company can weather a financial storm and that if earnings were to decrease, they would still have enough money to pay out a dividend.

Look for ratios below 0.5 (50 percent payout of earnings).

Red Flag: If the ratio is increasing, this dividend could potentially be rising in risk because it means either the dividend payout went up (not a bad thing) or the earnings went down (potentially bad).

Where to Find It? You can find the Yield on Yahoo Finance or some Brokerage Tools. On Yahoo Finance, look under the Statistics Tab.

Let’s compare again!

CompanyDividendEarnings Per Share (EPS)Payout Ratio

Winner: JP Morgan 

Watch Out for Exceeding Debt

A company with exceeding debt may be troubling. Well-managed debt can be leveraged to increase revenue. 

Debt may not be bad always but can be a good way to choose between a couple of investments that you are considering.

Where to Find It? You can find the Debt to Equity Ratio on Yahoo Finance or some Brokerage Tools. On Yahoo Finance, look under the Statistics Tab.

When looking for debt, consider using the debt/equity ratio which shows the number of a company’s liabilities to the equity of shareholders.

JPM – 42%

JNJ – 48%

PG – 63%

Winner: JP Morgan

Keep an Eye on Historical Performance

Dividends are obviously important for Income Investors but if the stock isn’t growing as well, dividends are a pretty poor investment. Choosing companies that are growing in value as well as paying dividends is crucial to the success of the experienced Income Investor. 

There are a couple of ways to look at historical performance.

One way is to choose one of the above metrics and see how they change over the last 5 or 10 years. Another way is to look at the stock charts. 

Since the above factors that we looked at are based mostly on fundamental analysis, we could try using the chart, which is more of a technical way of analyzing stocks.

In fact, these charts are pretty good at getting a snapshot of historical performance. 

Where to Find It? You can find historical charts on Yahoo Finance and all Brokerage Apps and Sites. On Yahoo Finance, look under the Chart Tab.

I pulled up the last 5 years for all three of our test group companies from Webull:

All three are trending in a positive direction in share price which is a good signal.

 If you were to invest money in any of these companies five years ago and ignored dividends, you would have still grown your investment:

JPM – 63%

JNJ – 29%

PG – 63%

Winner: Proctor & Gamble

I know. I know. They tied JP Morgan but if you look at the fact that PGs low price trends and high price trends are much closer together, it appears to be a stronger stock in the sense that it is less susceptible to volatility during times of crises. 

All three of them were hit by the recent bear market and PG is weathering the storm fantastically in comparison.

Invest in Dividend Aristocrats with a Proven Record

I promised a bonus tip. See? I didn’t forget. Dividend Aristocrats are stocks that have been given this label due to having a track record of paying increasing annual dividends for at least the past 25 years. These are usually older and more stable companies and often don’t aggressive gains in the stock market. What they lack in yearly gains, they more than makeup for with dividend payouts.

People that invest in a portfolio of Dividend Aristocrats will benefit from increasing dividend payments each year. This type of dividend investing is great for those that prefer steady payouts rather than liquidating shares. You can even invest in NOBL (Proshares S&P 500 Dividend Aristocrats) ETF if you really want to try out a pushbutton investment with Dividend Aristocrats.

Final Takeaways

Dividends are pretty awesome, right? Find them by searching on your brokerage (checkout Webull if you don’t have a brokerage) or search Dividend Focused ETFs with the dividend history that you like.

Once you find a bunch, make sure they meet criteria that fit your portfolio and investing style. Choose the four factors that I like, or choose your own mix to help you find the right fit for you. 

There’s no perfect plan for investing but failing to plan always means planning to fail, so make sure you have an investing method. I hope you got something out of this article!

Take care and let’s start investing!

Eric Baglio

Eric Baglio has been investing for over ten years and learned a lot of valuable lessons along the way. He has helped numerous people start investing on their own and founded Let's Start Investing to help anyone willing to learn how to build wealth. His favorite brokerage is Webull and his favorite stock advising service is Motley Fool Stock Advisor.

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