We have been receiving several requests from readers to help them determine when it is the right time to buy a dividend stock. First off, there are no easy ways to know when to buy dividend stocks or not. However, there are some key points to look at. Those key ratios and indicators will guide you to find the perfect moment when to buy dividend stocks.

When to Buy Dividend Stocks According To Dividend Ratios

Personally, I think that it is always the right time to buy dividend stocks… as long as the fundamentals are there. There are some key dividend ratios you must observe before buying a dividend stock.

A) Dividend yield and dividend payout

When I use a dividend stock screener, I always look for dividend yields over 3%. While I may be doing exceptions and buy lower paying dividend stocks, my main goal is to cover more than the inflation (for more info, read dividend vs inflation). Therefore, I consider a right timing to buy a dividend stock when the dividend raise to 3% or the stock value temporarily drops enough to show the dividend yield I am looking for.

B) Dividend Growth

Dividend raises are very important in a dividend portfolio. Since the purpose of dividend investing is to hold your stocks during several years; you want to make sure that your holdings will generate more money in the future. The 2 important ratios for dividend growth is the 1 year dividend growth and the 5 years dividend growth. The first one will tell you about the current situation of the company (if they are able to raise their dividend currently). The latter will tell you if they can maintain a steady dividend growth over time. I like dividend stocks showing a dividend growth over 5% (yearly and over 5 years). This tells me that there are solid dividend payers and that it is the time to buy this dividend stock.

C) Dividend Payout Ratio

The dividend payout ratio must be lower than 75%. If you are looking at dividend stocks with a higher dividend payout ratio, you are looking at a stock that might encounter problem increasing their dividend payout over the long run. When you are looking at the right timing to buy a dividend stock, look at their recent dividend raise announcement and how was the dividend payout ratio. If they recently raise their dividend payout without impacting too much their payout ratio, this is the right time to buy this dividend stock.

When to Buy Dividend Stocks According To Other Financial Ratios

A) Price / Earning Ratio (P/E)

The P/E ratio is one of the most common financial ratios. It should be a must to be included in any stock analysis. The historical S&P 500 P/E ratio is around 15. Therefore, if you find a solid dividend payer showing a P/E ratio below 15, you may have found the right time to buy this dividend stock.

B) Revenue Growth

Dividend payouts are all about how much money is left in the company after taxes. Therefore, if you want another indicator of long term dividend growth, you should look at revenue growth. If the total sales are climbing on a steady basis, chances are that the dividend payout will increase accordingly. Steady revenue growth (1yr vs 5 years) is a good indicator as to when to buy a dividend stock.

C) Return on Equity (ROE)

The return equity gives you how much the money invested in this company is creating wealth. Having sales growth is good, but growing its profit and increasing the company value is much better. A ROE over 5% is suitable (and over 10% is even better!).

Is there a perfect timing to buy a dividend stock?

I just gave you a few indicators as to when buying a dividend stock. Those numbers are relatively easy to find using free investing websites. However, if your dividend stock meets those requirements, does this mean it’s the right time to buy it?

Since the goal of dividend investing is to select solid dividend payers which will increase their dividend payouts in the future; I’d say yes. However, it is important to look at what is the recent news around the company you are looking for and what are the potential opportunities and dangers.

For example, if you look at a pharmaceutical stock, it is important to look at their patent expiring dates (which equals to a decline in sales for a specific medicine) and what their pipeline look like (how many medicine are currently being researched). This is will also tell you a lot about when to buy this dividend stock.

Where to start looking at for any dividend stocks