Dividend Stock Buying Criteria

Criteria For Purchasing Dividend Stocks

When making any sort of investment it’s important to have a set of criteria for when to buy and when to sell.  I’m a firm believer in dividend growth investing.  I believe that if you invest in great companies with a long-term time horizon you shouldn’t look for hero prices or obsess over valuation.

I’ve seen so many people miss out on huge gains and profits all because they are “waiting” for a certain price.

Let me give you two examples:

  1. I have a friend who won’t buy stocks until SPY pulls back 20%. He’s been saying this since 2012, he’s missed out on over 100% gains in many many stocks. He’s missed out on hundreds of thousands of dollars in potential gains. Now if the market pulls back 20%, he will be buying in the price range we were in, in 2015.
  2. A friend of mine passed up on a real estate investment deal in 2008 because he refused to pay over “full price”. I purchased the property after he passed on it, I paid $2500 over full price due to multiple offers. Now almost 10 years later I’ve made $270,000 in appreciation on this investment and am generating a 15% cap rate (yield) on my investment. My friend lost out on this because he refused to pay $2,500.  My friend saved his ego and $2,500 and lost $270,000+.

Think about it, if your investing time frame is anything over 10 years, don’t miss out on opportunities because you’re waiting for “hero prices.”

The biggest regret I hear from people when talking about investing is; I should have bought AMZN in 2010, I should have bought MO in 1990.

A poor performing long term investment is better than no investment.

I find great companies at a good to fair value and invest in them with a time frame of forever.

All that being said it’s important to not just blindly invest, you should have a set of rules you follow when investing.


Dividend Stock Purchase Guidelines

The below criteria are what I am looking for when adding to our purchasing a stock.

Regular Stocks (Non-utilities or REITS)

Regular Stocks

  1. The stocks are on either a dividend challenger, contender or aristocrat.
    1. Dividend Challenger – Is a stock that has increased their dividend payout for a minimum of 5 to 9 years.
    2. Dividend Contenders – Stocks that have increased their dividend payout for a minimum of 10 to 24 years
    3. Dividend Aristocrats – Increased their dividend payout for a minimum of  25 or more years.
  2. The historical PE shows the company is not highly overvalued. Ideally, I like to see a company trading at or below its normal P/E
  3. Payout ratio of less than 60% (REIT’s and Utilities I use different metric).
  4. Free Cash Flow is significantly higher than the dividend.
  1. Dividend Growth Number- (Dividend Growth # = current yield + 5 yr dividend growth rate.)
    1. Yield between .05-2.0%, I want a Dividend Growth # of 20 or higher. (current yield + 5 yr dividend growth rate = 20 or higher)
    2. Yield between 2.0-2.5%, I want a Dividend Growth # of 15 or higher (current yield + 5 yr dividend growth rate = 15 or higher)
    3. Yield between 2.5-3.0%, I want a Dividend Growth # of 13 or higher (current yield + 5 yr dividend growth rate = 13 or higher)
    4. Yield of 3.0% or higher, I want a Dividend Growth # of 10 or higher (current yield + 5 yr dividend growth rate = 10 or higher)
  2. An S&P quality ranking of BBB+ or better.
  3. Earnings growth and free cash flow growth shows a rising trend for the past 5 to 10 years.

Additional Criteria

If I’m still having trouble narrowing down a stock to purchase or add to I will use these additional criteria’s too narrow down my selection.

  1. When price is trading in line with the adjusted earnings growth rate this is a positive signal that a stock is trading at a fair value. The below example of Cardinal Health Inc. shows what I’m referring to.

2) I review the companies Debt/Cap. I don’t like to see an overwhelming amount of debt, this varies on each industry and recent aquistions, but overall companies with tons of leverage I usually pass on.

For REITS & Utilities

  1. The stock is a Dividend challenger, contender or aristocrat.
  2. Dividend Growth number is 8 or higher
  3. Earnings show a 5-10 year uptrend
  4. CRFFA’s quantitive value model rank or 3, 4, or 5. (5 being most undervalued, 1 being overvalued)
  5. The stock is trading in line with it’s price to funds from operations P/FFO.
  6. The price of the stock is trading in line or under its dividend POR

When to Sell

For dividend stocks the only time I will sell is when a stock cuts or suspends its dividend. I will sell immediately when a stock announces it has cut/suspended its dividend.

I’m a firm believe that the less you tinker with your investments the better they will do. The fidelity study of 80,000 accounts which showed that the best performing accounts were those of people who forgot they had accounts or had died.