Stock screeners are important in narrowing down thousands of companies into a handful to conduct further research. I developed my strategy after conducting research into various methods devised by many popular blogs in the dividend investment niche. Hopefully this guide can help shorten your hunting for solid companies to invest in.
The most comprehensive list I found is at the Drip Investing site. Originally created by the late Dave Fish, the list is split into three distinct categories and 810 individual stocks. I start my search by reviewing the Dividend Champions list which displays companies with dividend increases for the past 25 years. There are 139 stocks on the June, 2020 list.
- Sustained growth over the long term is my primary focus as a long-term investor.
- Earnings per share or Normalized earnings per share need to be positive with 10-year compound annual growth rate of 2.5%
- Dividend growth must show 5-year or 10-year compound annual growth rate of at least 7%. The company may have a history of dividend payouts, but I want to see a solid growth rate
- Yield must be over 2.5% and under 7.5%. I plot the 10-year high and 10-year low yields on a chart along with the current yield. I want a current yield near the 10-year high yield mark.
- My screener limits my scope to stocks under a P/E of 20. Comparing P/E to other companies in the same sector can indict if a stock is over or under priced. I plot the 10-year high and low P/E ratios on a chart and compare to the current ratio. Stocks near the 10-year low appeal to me.
EPS/FCF Payout Ratio
- Dividend to earnings per share ratio needs to be under 60%
- Dividend to free cash flow per share ratio needs to be under 70%
- There needs to be room for continued dividend growth. EPS payout under 60% is a popular metric, but I include free cash flow as dividends are paid in cash.
Once I narrow down my stocks to a manageable amount, I review future earnings and future dividend estimates. Utilizing two analyst reports, the 5-year high yield, dividend discount model, and low P/E ratio to determine fair value. My goal is a 10% discount to the fair value number. Finally- I read the last two annual reports and four quarterly reports. I want to understand what the business does to make money. I want to be able to purchase the products my company produces and be able to explain what they do.