3 Tips For Finding Strong Dividend Paying Stocks

What’s up Profit Zone gang!

Today’s edition will be packed with valuable information on building a dividend portfolio and tips on analyzing dividend growth stocks.

The coolest part about dividend investing is that it’s like having your own money garden. Trust me, it will be one of the most beautiful gardens you’ll ever have the honor of taking care of. And one that you’ll most definitely want to show off later on down the road.

In the 1st year, you’ll start off with just a few plants. Nothing too crazy. It will look a bit empty but it’s the start of something great.

But then you’ll plant some more in year 2. And a few more in year 3. And then you start giving them the water and sun they need to grow. Eventually, they’ll start producing some vegetables or maybe even some fruit. And now you can eat for free.

So what’s the point of this story?

The point is when you stay consistent and give something time to grow, it can reach levels you never thought were possible.

But enough of the metaphors…

How do you build a strong dividend portfolio?

Because these money gardens don’t just grow by themselves. They’re dependant on how much time you spend taking care of them.

So let me show you how you can take care of your money garden using 3 simple tricks most people don’t know about.

Free Cash Flow Gets You Paid

But what is Free Cash Flow?

It’s essentially the money that’s available for distribution to all shareholders of a company. There can also be other uses for it, such as investing in long term projects, using it for research and development, as well as tons of other ways companies can use cash to grow.

But it’s so important to dividend investors because the more free cash flow a company has on hand, the more equipped it is to pay out dividends. Getting a good idea of a companies free cash flow can also help you identify if they can sustain their dividend payments long term or better yet, if they can grow it over time.

Growing Free Cash Flow is a GOOD Free Cash Flow

Remeber that. Write it down somewhere. Dream about it. Make it the wallpaper on your phone. Do whatever you need to do to.

If you’re wondering how to find a companies “free cash flow”, it will be on their cash flows statement. The one and only place you should focus all of your time trying to learn if you’re going to be a dividend investor. I can’t stress this enough. The cash flows statement will give you about 80% of the answers you need. The other 20% comes from ratio analysis and industry specific performance.

A good place to start is Yahoo Finance which is what I use to analyze financials.

You can type in the company of your choice in the search bar at the top of the page.

Then click “Financials” > “Cash Flow”.

Then just scroll all the way down to the Free Cash Flow section and voila!

How easy is that?

Mature Industries Are Your Friend

Just like people, companies go through a life cycle. And just like people, the older you get the more experience you gain. Companies that operate in mature industries are no different. They typically have their market figured out and understand how to sell to their customers. They have identified methods that work but more importantly they undertstand what DOESN’T work. Finally, they’ve been profiting for years and have tons of built up cash reserves (free cash flow) to pay out to shareholders like you and I.

The downside of investing in companies operating in mature industries is that you can’t expect large amounts of growth because most of their growing is already done. But you can expect to get PAID.

And that’s what we want right? A consistent dividend that grows over time. That’s the holy grail right there. Making more money every year for doing absolutely nothing.

Some examples of mature industries include:

  • The automotive industry

  • The tobacco industry

  • Oil and gas industries

  • Financial services industry

I personally salivate over large amounts of free cash flow because it gives a company so many options. A company like Apple keeps so many doors open just because of the amount of free cash flow it has on hand. They can choose to pay out more in dividends, they can pump more cash into R&D, they can fund long term projects, they can acquire other companies and they can pretty much do whatever they please.

Healthy Payout Ratio = Sustainability

The payout ratio can tell you a lot about a company. I won’t go into much detail about how to calculate it since you can just do a quick google search online and find the payout ratio for just about any company listed on the stock exchange.

But I will share with you exactly what a healthy payout ratio looks like. As well as explain what makes it “healthy”.

Note: I’m disregarding Real Estate Investment Trusts (REITs) because they operate at a much higher payout ratio typically around 90%.

Ever since starting my dividend investing journey, I’ve been careful to only buy shares of companies that hover around the 35 - 55% range when it comes to the payout ratio.

Why?

Because if the payout ratio is too low, you won’t be getting paid very much (not what we want).

If the payout ratio is too high, more often than not the dividend won’t be sustainable and you’ll likely see a dividend cut or a significant decrease in the near future (again - not what we want).

The benefit of investing in companies operating in the 35 - 55% range is that they will pay out enough to shareholders to make the dividend worth your while, but they’re also retaining a good chunk of their earnings to reinvest back into the business.

So not only will you be getting paid to just hold shares of the company, but you can sleep well at night knowing they’re also investing in their own growth which can drive up the share price helping you grow your money even more.

So if you can find a company that:

1) Has tons of free cash flow

2) Grows it’s dividend

3) Reinvests some of it’s earnings back into the business

You’ve found your diamond in the rough.

I hope you learned a thing or two today about finding strong dividend paying companies.

Now go out and start accumulating more shares in quality dividend stocks so you can watch your income grow with every year that passes.

Your friend,

- Alex (The Dividend Dominator)