Investing 101: How to Choose Dividend Stocks

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(List compiled by Alexander Crawford. Dividend, payout, and total debt/assets data sourced from Screener.co, all other data sourced from Finviz.) 

Dividends today are not a guarantee of payments in the future. If a company is paying a 4% dividend yield today, and you want to keep receiving that yield in the future, be sure that the company meets certain criteria and has a positive outlook to keep funding its dividend.

There are several things to consider:

- Is the company paying too much of their earnings out to shareholders? This is measured by the payout ratio (dividends/earnings), and a ratio above 35-40% can be considered unsustainable. If a company takes a hit in profits one year, it may find itself strapped to keep up its high payouts.

- Is the company’s dividend yield too high? Dividend yield (dividend per share/share price) above 7% may also be considered unsustainably high.

- Is company debt under control? Debtholders are always paid before dividends. When debt grows out of control, so do interest payments, which cut into the cash that can potentially be paid as dividends. If a company’s total debt/total assets ratio is below 0.20, the company’s debt is relatively low. 

To illustrate these concepts, we ran a screen on stocks seeing rises in their dividend per share, comparing the current year estimate to the trailing-twelve-month dividend. These stocks have payout ratios below 35%, dividend yields below 7%, and most recent quarter total debt/assets below 0.2.

Do you think these stocks will maintain their dividend yields? Use this list as a starting-off point for your own analysis.

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List sorted by dividend yield.

1. OneBeacon Insurance Group, Ltd. (OB): Surety & Title Insurance Industry. Market cap of $1.19B. Dividend yield at 6.67%, payout ratio at 11.91%. Current year dividend per share estimate at $1.17 vs. TTM dividend per share at $0.84. MRQ total debt/assets at 0.05. The stock is a short squeeze candidate, with a short float at 6.66% (equivalent to 10.99 days of average volume). The stock has gained 12.77% over the last year.

2. National Presto Industries Inc. (NPK): Appliances Industry. Market cap of $649.15M. Dividend yield at 4.24%, payout ratio at 11.14%. Current year dividend per share estimate at $8.65 vs. TTM dividend per share at $1.00. MRQ total debt/assets at 0.00. The stock is a short squeeze candidate, with a short float at 10.22% (equivalent to 20.57 days of average volume). It's been a rough couple of days for the stock, losing 7.72% over the last week.

3. BP plc (BP): Major Integrated Oil & Gas Industry. Market cap of $137.67B. Dividend yield at 3.86%, payout ratio at 13.17%. Current year dividend per share estimate at $1.71 vs. TTM dividend per share at $0.84. MRQ total debt/assets at 0.16. It's been a rough couple of days for the stock, losing 5.57% over the last week.

4. The Interpublic Group of Companies, Inc. (IPG): Advertising Agencies Industry. Market cap of $4.42B. Dividend yield at 2.66%, payout ratio at 30.03%. Current year dividend per share estimate at $0.23 vs. TTM dividend per share at $0.18. MRQ total debt/assets at 0.14. It's been a rough couple of days for the stock, losing 27.62% over the last week.

5. KLA-Tencor Corporation (KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.44B. Dividend yield at 2.61%, payout ratio at 22.78%. Current year dividend per share estimate at $1.18 vs. TTM dividend per share at $1.00. MRQ total debt/assets at 0.16. It's been a rough couple of days for the stock, losing 12.24% over the last week.

6. MKS Instruments Inc. (MKSI): Diversified Machinery Industry. Market cap of $1.29B. Dividend yield at 2.45%, payout ratio at 10.63%. Current year dividend per share estimate at $0.60 vs. TTM dividend per share at $0.30. MRQ total debt/assets at 0.00. It's been a rough couple of days for the stock, losing 5.39% over the last week.

7. First Commonwealth Financial Corp. (FCF): Regional Banks Industry. Market cap of $522.45M. Dividend yield at 2.42%, payout ratio at 14.25%. Current year dividend per share estimate at $0.12 vs. TTM dividend per share at $0.06. MRQ total debt/assets at 0.06. The stock is a short squeeze candidate, with a short float at 5.67% (equivalent to 11.22 days of average volume). It's been a rough couple of days for the stock, losing 6.21% over the last week.

8. Tower Group Inc. (TWGP): Property & Casualty Insurance Industry. Market cap of $921.66M. Dividend yield at 2.34%, payout ratio at 14.71%. Current year dividend per share estimate at $0.69 vs. TTM dividend per share at $0.46. MRQ total debt/assets at 0.09. The stock is a short squeeze candidate, with a short float at 11.37% (equivalent to 17.23 days of average volume). It's been a rough couple of days for the stock, losing 6.69% over the last week.

9. Magna International, Inc. (MGA): Auto Parts Industry. Market cap of $11.03B. Dividend yield at 2.20%, payout ratio at 15.21%. Current year dividend per share estimate at $0.91 vs. TTM dividend per share at $0.67. MRQ total debt/assets at 0.01. Might be undervalued at current levels, with a PEG ratio at 0.89, and P/FCF ratio at 14.53. It's been a rough couple of days for the stock, losing 9.76% over the last week.

10. The Bank of New York Mellon Corporation (BK): Asset Management Industry. Market cap of $30.06B. Dividend yield at 2.15%, payout ratio at 18.66%. Current year dividend per share estimate at $0.51 vs. TTM dividend per share at $0.40. MRQ total debt/assets at 0.09. It's been a rough couple of days for the stock, losing 5.36% over the last week.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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