How to “Look Under the Hood” Of a Dividend Stock

I’m a car guy, so I know firsthand how much goes into buying one. And let me tell you, it is a much more exhausting process than say, picking a snack from a vending machine. Well, technically nowadays you can get a car from a vending machine, too, but a lot of homework goes into it before you press A1.

When I go to buy a car I look at the gas mileage, the warranty, the horsepower, the safety features and a host of other options. Some factors are obviously more important than others – it doesn’t matter much to me if the car is cherry red or firecracker red – but a failing mark in any area is almost always cause for disqualification.

The same rules apply to stock picking – you need to look “under the hood” to make sure that your investments are safe, reliable and ready to perform for the long haul. This is why I only invest in healthy, growing stocks and avoid companies that are seeing their sales and profits shrink.

I’ve been investing for about 40 years now, so I know how overwhelming it can be when trying to find those stocks. There are thousands of numbers you have to sort through, and when you throw in all the talking financial heads practically shouting from the rooftops that NOW is the time to buy stock A, B or C? – Forget about it.

If you’re looking for dividend stocks, then you’re opening a whole other can of worms. Because, as we’ve talked about before, a high dividend may look flashy, but in reality it’s just a lemon.

I have found there are four key factors you need to pay close attention to when analyzing dividend stocks: Dividend Trend, Dividend Reliability, Forward Dividend Growth and Earnings Yield. Let’s break down each one:

Number 1: Dividend Trend

You want to be sure that you’re investing in dividend stocks that have the ability to increase their dividend payments. I check this by looking at the company’s last four dividend payments and asking myself a few questions: Are they increasing? Are they decreasing? Are they staying the same? Decreasing dividend payments are a bad sign (it often means the company isn’t doing well), and you want to avoid those stocks.

Number 2: Dividend Reliability

You also want to be sure that the company pays regular dividends. Missing a dividend payment is another sign of trouble for the company, so a big part of my decision to buy, hold or sell is based on how consistent the payments are.

Number 3: Forward Dividend Growth

There are a lot of things to consider when looking at forward dividend growth. I consider growth estimates for the company, and I’ll look at projections for how the dividend will grow, too. Overall, I want to be sure that the company is headed in a positive direction and that the dividend payments will be increasing as the company becomes increasingly profitable.

Number 4: Earnings Yield

My final measurement looks at the quality of the company’s earnings. A high number shows me that the company will be able to pay dividends in the future and that there is a good chance that the payments will increase. On the other hand, a low or negative earnings yield shows the possibility of decreasing dividend payments or maybe even the elimination of dividends for that company.

As you can see, the work here you have to do to find the best dividend stocks is a lot! Personally, I look at more than 1,000 dividend stocks every week.

But here’s the good news: If you use my handy Dividend Grader, you don’t have to put in that kind of work. I combine those four factors, which determines the final buy, hold or sell recommendation for each stock. These grades are then put into Dividend Grader as a letter grade (A being the best; F being the worst), so you know whether is a “Strong Buy” or a “Strong Sell.”

So, with Dividend Grader, it really is as simple as selecting A1.

Don’t Just Invest In Dividends

While having dividend stocks in your portfolio is very important to help smooth out your overall performance, your portfolio needs to be diversified, too. So, in my Growth Investor service, I recommend both dividend stocks and growth stocks. These are separated into two Buy Lists: High-Growth Investments and Elite Dividend Payers.

Today I have some exciting news for you: I recently recommended an AA-rated dividend stock for my Elite Dividend Payers Buy List, which is off to a solid start. I also recommended an exciting new stock in my High-Growth Investments Buy List. It’s in the aerospace sector and provides imaging sensors that have unveiled galaxies that are more than 13 billion light-years away.

But I’m not interested in just the aerospace space; I see a lot of potential in cybersecurity, 5G and artificial intelligence (A.I.), and have recommended stocks in those sectors, too. These stocks have all been very strong performers; in fact, two hit new 52-week highs earlier this week. And all of them are up more than 40% on my High-Growth Investments Buy List – with much more to come, thanks to the megatrends I just mentioned, whose full potential has yet to be realized.

If you sign up now, you can get the names of my most-recent recommendations, as well as the companies that are poised to lead the cybersecurity, 5G and A.I. sectors. Plus, you’ll have unlimited access to three bonus reports that detail the growth ahead in these industries.

Click here for my full briefing now.

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