Things You'll Need:
- Access to the Internet
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Step 1
Understand how dividend yield is calculated. Dividend yield is calculated by taking the per share dividend amount and dividing it by the current price. For example, most detailed quotes pages will list the dividend. On Yahoo Finance, look up symbol DSU. On the quote page you can see the dividend (as of March 29, 2008) is $0.64. The current price is $5.14. So the dividend yield is 12.45% (.64 divided by 5.14).
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Step 2
Determine if the dividend will continue to be paid in the future: look at historical dividends. For example, go to Morningstar.com. Pull up a quote in PCU. Scroll down the right-hand side of the page and click Dividends & Returns. Scroll down this page, and you can view the history of the dividends going back two or three or four years. You can estimate that if dividends have been paid steadily for the past four years and have been raising steadily for the past four years, it might be likely that the dividend payments will continue. Understand that just because a company paid a dividend in the past, does not mean it will pay them in the future. But you do know for a fact, by looking at the list, how reliable the dividend payment has been in the past. You can often find a longer history of dividend payments on the company website (investor relations section).
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Step 3
Determine if the dividend will continue to be paid in the future: look at future earnings estimates. Well, you cannot predict the future, but you can look at future earnings estimates of Wall Street analysts. By studying earnings estimates regularly, you can get a good idea of whether earnings growth will continue in the future. Go to Yahoo Finance and pull up a quote on PCU. Scroll down the right-hand side of the page and click Analysts Estimates. On this page, you can view the average earnings estimates usually 1-2 years into the future. These are estimates and things can changes quickly, but if future estimates are steady and/or growing, one can estimate that dividends will likely continue in the future.
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Step 4
Find the list of high dividend paying stocks. This step is surprisingly easy if you know where to go. Morningstar.com has a stock screener that you can use to search for all dividend paying stocks. Go to Morningstar.com, click on the Stocks tab and scroll down the left-hand side of the page to the Tools section and select Stock Screener. As you learned earlier, reliable dividends are paid from a strong history of dividend payments and strong future earnings. So to generate our list, select the Profitability Grades of A and B. Select Financial Health of A and B. Scroll to the bottom of the page and select “Dividend yield greater or equal to:” 6%. Then click on Show Results.
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Step 5
Go through this list one by one and write down the following information on a piece of paper or spreadsheet: Symbol, Dividend History, Earnings Estimates. For each stock, write down in the Dividend History column whether historical dividends were falling, flat or rising. Under the Earnings Estimates column write down whether future earnings estimates are predicted to fall, stay flat or rise.
Stocks that have rising historical dividends and rising future earnings estimates are likely to be good candidates for your final list to consider. -
Step 6
Remember that higher yield means higher risk. Why do you think the company is paying such a high dividend? They do it to encourage investors to take a higher risk by paying a higher return. So know the risks. Study historical dividends and earnings and the future earnings estimates. If you really want to get advanced, learn to study the cash flow statements.
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Step 7
Do your homework. Understand the risks associated with high dividend paying stocks. I have listed a few good books in the Resources section.
Comments
nurseryguy said
on 6/10/2009 Great information !
detrawilson said
on 4/14/2008 This information was very useful for a person with very limited knowledge in this area. Thanks!