How I Choose My Dividend Stocks

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Continuing on my search for potential dividend stocks to add to my portfolio I look for stocks trading at decent to good values. Using the most simplistic measure, I pay attention to current, forward and historical P/E ratios. From Investopedia, “The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.” With this basic metric for judging value, I am able to see if a stock is trading at a good value or not. While not directly correlated to dividend health, the P/E ratio can help determine if the stock is offering a good current yield or not. Some current stocks from my portfolio that are trading at current low and historical PEs include, W.W. Grainger, Inc. (GWW) and The Bank of Nova Scotia (BNS) to name a couple.

Diversity among my dividend payers is crucial too. While scouring the Dividend Aristocrats list, it’s important to find stocks that hail from various sectors and industries. Personally, I favor the consumer staples the most for my long term portfolio as it offers many very defensive and stable long time dividend payers. I own stocks from other sectors as well, including industrial, finance, health, conglomerates and more. For personal reasons, I never owned any energy nor tech stocks in my long term dividend growth portfolio for the anxiety these volatile sectors potentially provide. The way I see it, asset allocation is merely a reflection of your own investment tastes and tolerance for risk. By most measures, my portfolio would be considered a lower risk and conservative collection of stocks.

There you have it. My basic methodology for choosing dividend paying stocks. It’s definitely part art and part science as sometimes certain investments just have a “right feel” to them even though the current numbers might not make perfect sense. If you have a long term horizon and can find a growing and sustainable business, it might make sense investing in that company for the long haul. After all, a dollar or two difference here and there in share price, usually does not make much difference in your long term returns especially if your focus is primarily passive income growth. We all know that time in the market is much better than timing the market when it comes to compounding dividend returns.

Disclosure: Long ADM, GWW, BNS, ITW, BDX, BCR, MMM, EMR

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