Choosing the best dividend growth stock involves a lot more than looking at a company’s dividend payment history. There are several other things to consider before you can find the best one. In this article, we will show you how to successfully find high growth dividend stocks to invest in.
But first, let’s talk about what dividend growth stocks are.
Dividend growth stocks ― what are they?
Let’s begin by saying that dividend growth stocks are companies that increase their dividends paid on a frequent basis.
The unwritten rule is that any company can be considered a dividend growth stock if it consistently raises its dividend payouts at least once a year.
Some companies raise the dividend payouts on a quarterly basis. Others do so on a yearly basis.
Main categories of dividend growth stocks
Another important thing you should know is that there are several dividend growth stock categories.
Ultimately, there is no established definition for each of the following categories. Before we explain each one, it’s important to remember that you shouldn’t focus solely on the company’s past performance. There are other factors you need to consider before coming to a decision.
- Challengers are stocks that have raised dividends during the past 9 years.
- Contenders are stocks that have raised dividends during the past 10–24 years in a consistent manner.
- Dividend Champions are stocks that have been consistently raising dividends during the past 25 years.
- Dividend aristocrats are the same as dividend champions. Additionally, aristocrats need to have their stocks listed on the S&P 500.
- Dividend kings are companies that have been consistently raising their dividends during the past 50 years.
Dividend payout ratio
A dividend payout ratio is basically an indication of the amount of money that a company is giving back to its investors against the amount it’s keeping to pay off debt, reinvest, or add to retained earnings.
How to calculate the dividend payout ratio
In order to calculate the dividend payout ratio, you need to divide the dividends by net income (dividends/net income)
You can find out a lot about a company with this formula. For example, you can determine the sustainability of a dividend. Any company that pays a high percentage of dividends won’t be able to keep it up for long.
A payout ratio of 100% isn’t sustainable. Basically, a 100% payout ratio means that the company is returning more money than it’s earning.
This payout ratio should be used when you’re in a dilemma about whether you want to invest in a profitable company that pays dividends or a company that has a high growth potential.
Finding a high dividend growth stock
Now that you know what a dividend growth stock is and how to calculate the dividend payout ratio, it’s time to find a stock worth investing in.
First of all, you need to take a look at some stocks that are paying out dividends and view their payout ratio. Look for companies with a 30% payout ratio and lower. Why? Because this percentage shows that these companies have a significant amount of leftover cash that they can use to fund their other objectives. Furthermore, anything up to a 50% payout ratio is acceptable.
Next, look at the credit rating of each company. See which companies have the best investment grade ratings. The credit rating is important because any company that wishes to borrow money in the future needs to have a good investment grade rating.
Keep in mind that a new company that wants to expand and develop new products is allowed to have a 0% payout ratio. However, an older, more established company with a sizable cash flow isn’t allowed this luxury.
Hopefully, this article has cleared up any questions you may have had about the dividend growth stocks.
If you want to find a high growth stock, start by viewing the dividend aristocrats and champions and go from there.
All in all, if you want to successfully invest in high growth dividend stock, you need to be patient and completely subjective. Remember that dividends are industry-specific, which means that the payouts are different.