This means that successful dividend investors want to build a collection of the highest dividend stocks they can find because the richer the dividend, the more money that he or she will find automatically deposited in the bank each year (or, if they are old-fashioned, find stuffed in their mailbox in the form of a paper dividend check). I've already given you some suggestions for how you can find stocks for your portfolio, but finding the highest dividend stocks is a bit trickier.
The reason? Like all things in life, dividend investing is rarely as simple as it sounds. Finding the highest dividend stocks can be fraught with danger because companies often have high dividend yields for a reason. Most commonly, it is the result of investors avoiding the shares, which can occur because they believe that the dividend is in danger of being cut or they think the business is in trouble and might not survive long-term. I explained some of the pitfalls facing investors who search for the highest dividend stocks in an article called Watch Out for the Dividend Trap - When High Dividend Yields and Low P/E Ratios Are an Illusion.
How to Find the Highest Dividend Stocks Without Taking on Too Much RiskThere are some things you can look for if you want to build a portfolio of the highest dividend stocks but you still desire some protection against the downside. These are:
- Make sure the dividend payout ratio doesn't exceed 60% to 70%. That means that the company is retaining at least 30% to 40% of its earnings for expansion.
- Your dividend stocks should be in companies that have pricing power. That is, they can increase prices to offset a high inflation rate and keep the checks rolling into your bank account even if the government is printing money like crazy.
- Look for stocks that have a debt to equity ratio of less than 50%. That means a company has $1 of net worth for every $1 in debt. In financial terms, this is called the capitalization structure.
- Look for stocks that have a p/e ratio of 15 or less. This can offer some additional downside protection in the event the dividend is cut.