Identifying Dividend Stocks for Beginners

Published Mon, 09 Dec 2013 10:00 CET by DividendYields.org

Generally, the aim here is to provide investors and stock pickers with insight into dividend stocks from around the world, and bring to attention companies that might otherwise go “under the radar” and escape attention. However, this article is a little different. Instead of offering stock tips and picks, it will take a step back and have a look at what makes up a great dividend stock. The aim is to provide the first steps in broadening the knowledge of what makes a good dividend stock beyond simply the dividend yield next to the stock ticker. The dividend yield is merely a starting point for further research.

Buy Businesses, not Dividend Yields
The first thing that can be gained from taking a step back is a step away from the devotion to simple percentage yield. This might seem like a counterintuitive action, but the logic suggests otherwise. First of all, it is known that a dividend is an earning that is not retained as profit within the company. So obviously there must be profits to distribute to have a dividend. Nothing new yet.

The best dividend stocks are those that can grow their dividends over time, otherwise the real value of what investors receive is eroded by inflation and other rising costs. For example, if Coca Cola held it's dividend at 1996 levels investors would be receiving a payment 130% less than 2013 levels. Therefore, a business which is increasing its dividend must also necessarily be increasing its profit, otherwise such payments would be unsustainable. Coca Cola clearly has been able to do this by retaining the number one position in terms of drinks, preserving it's secret formula, staving off intense marketing and competition from rivals (think Pepsi's multi-million dollar contract with Beyoncé) and diversifying its product range with new offerings such as Cherry and Vanilla Coke.

So the health of a business directly contributes to it's ability to first of all pay, and second of all, grow, it's dividend payouts to investors. So which companies hold this kind of power?

Steady Dividend Growth
Buy Boring
The factors that contribute to a successful company with the ability to grow it's profits sustainably make up a long list, ranging from industry competition, management skills, successful execution of investment risks, employee engagement and so on. But in terms of dividend payments, one of the most desirable qualities to have is to be boring. Doesn't sound right does it?

Look at it this way. If someone were to lose their job, they would be unlikely to walk into their local store and buy the latest iPad. That rules out Apple Inc. But what they would do would still buy food, gas and medicine: the bare essentials, and also the affordable luxuries. The listed examples are not hard to find. Even if you were unemployed, the car would still be filled up with gas, likely from Royal Dutch Shell, BP, ExxonMobil or Chevron. The grocery shopping would still need to be done, so Wal-Mart, Carrefour or Tesco would get a visit. There would still be the need for necessities like band-aids for when the kids scraped their knee (Johnson & Johnson and Proctor & Gamble) and medicine for when anyone in the family got sick (Glaxo Smith Kline, Roche, Novartis). Boring is beautiful in terms of dividend stocks because it means those businesses are indispensible. And indispensible means that the earnings are recurring and therefore so are the profits and the dividends.

The Search for Power
The final piece of the puzzle is to look for businesses with pricing power. For example, the listed pharmaceutical companies have limited pricing power because their competitors also seek to research, develop and market drugs that treat the same common (and therefore lucrative) ailments that all people have. The same thing is true of energy producers because they extract and sell the same basic product – resources in the form of natural gas or petroleum. The truly great dividend stocks are the companies that retain the ability to charge more for their products because the users are not happy to substitute it. The best example is also the simplest. Attempting to convince a Coke drinker that Pepsi is the same thing is likely to be a short conversation, because Coca Cola has been able to retain a loyal brand following, and therefore increase the prices that its charges it's customers. Wal-Mart has a similar advantage by lowering it's prices as much as it can because it drives the perception they are the lowest cost retailer in the market, and therefore attracts more customers than it's rivals, who cannot match it's cost cutting because they do not have the same amount of customers and earnings. Buying stocks with enduring pricing power is a sound tactic in ensuring that the dividend payments you receive are sustainable and likely to grow in the future.

Conclusion
None of the companies mentioned above are hidden gems or unheard of dividend stars. That is not the intention of this article. The intention is to get you thinking about what makes a great dividend paying business next time you come across a high-yielding stock tip, using companies that are well-known and easily recognised. Hopefully the lessons contained above will help to form a more rational and successful investing approach for all that choose to apply them.


Stock name Dividend Yield
Bp 6.45
Royal Dutch Shell A 5.35
Exxon Mobil 4.83
Glaxosmithkline 4.47
Glaxosmithkline 4.13
Tesco 4.01
Chevron 3.91
Novartis 3.54
Coca-cola 2.94
Johnson & Johnson 2.93
Roche 2.64
Procter & Gamble 2.49
Novartis 2.08
Wal-mart Stores 1.83
Carrefour 1.72

Articles featuring Bp (BP):

BP's Dividend Sangfroid May Not Last Long

Days after Norwegian peer Equinor slashed its first quarter dividend by two-thirds, BP's chief executive announced he will distribute $10.50 per share to investors, unchanged from the previous quarter.Multiply BP's $952 million of first quarter operating cash flow by four, knock off $12 billion of capital expenditure, and the company will burn through $8.2 billion this year.If prices stay depressed for much of the rest of the year, BP's operating cash flow will deteriorate,... Read more

The Retirees' Dividend Portfolio: John And Jane's March Taxable Account Update

The Taxable account generated $1,307.57 of dividends in March of 2020 compared with $1,017.34 of dividends in March of 2019.A total of two stocks/funds in the Taxable portfolio paid increased dividends or paid a special dividend during the month of March.John and Jane have used about half of their cash position to acquire shares after they lot a tremendous amount of value over the last six weeks.We are focusing the cash available to the strongest companies, but we are also directing... Read more

March 2020 Dividend Portfolio Update: A Month To Remember

March 2020 is surely a month to remember, not just for a week, a month or a year but forever.Cash has proven to be king and I have mostly run out of it just when markets were in meltdown mood.March generated $442 in dividend income, up 22% sequentially and +11% Y/Y.I outline portfolio composition by sector and portfolio weight for every holding.March 2020 is surely a month to remember, not just for a week, a month or a year but forever. Markets were tanking and flying on almost... Read more

Why Oil Majors' 7-11% Dividend Yields Could Be In Danger

Oil majors underperformed the market significantly over the last years, increasing their dividend yield significantly to 7-12%.Investors are questioning the sustainability of dividends as oil prices dropped to a 18-year low and a recovery is not in sight due to the COVID-19 pandemic and price war.In this article, I will create a model based on operational and financial parameters, which will try to predict whether the company will cut its dividends.The results are worrying. BP and... Read more

Shell's Juicy 15% Yield Stands Out Among Majors

Oil prices will remain low in the near term, but it seems likely that they will recover to pre-crisis levels in the long run.Shell has shown that it remain highly cash flow positive even in a low oil price environment.Shell can maintain its dividend at the current level through this crisis.Article Thesis Royal Dutch Shell (RDS-A) (RDS-B), one of the biggest oil and gas producers in the world, has seen its share price slump so much that its dividend now yields more than 15%. The... Read more