Hey YouTube.
I'm Jimmy in this video we're
going to go through how to find great
dividend stocks.
We're going to look quickly at the dividend screening process
that I use.
It includes some financial statement ratios
that I think are helpful in identifying
companies that have the ability
to cover their dividend maybe
increase it
and ideally keep growing
their business which will ultimately
help our dividend stocks
raise in price.
So our goal here is
to find the best dividend stocks
the most stable ones not necessarily
the highest paying dividend stocks.
We want stable dividend to providers
that can continue to increase their dividend.
OK. So there are many different screening tools
available to us online
and for this video.
I'm going to use the CNBC stock
screening tool I'll throw a link in the description
below. If you're interested in using it
it's free.
So that's good.
Now I think that there are many different
screening tools.
And the one that we choose is almost
unimportant to me the most important
part is the criteria that we're using
as line is as long as a screening tool
that each of us are using can use
dynamic enough criteria.
I'm happy with it.
OK. So let's imagine that we're going to try to identify
two or three different companies that are likely
to be great dividend paying stocks
for the next few years.
So we're going to try to narrow down the list.
And then once we've finished that I'm
going to show you different things that we could do that I do
to adjust I to make the list longer shorter
depending on what the results are.
OK so the first one I'd like to include
is return on equity return
on equity or ROE for short
is in CNBC is
management efficiency category.
Now in theory we want a return on equity
to be as high as possible
but to keep our list under control
I'm going to enter in return on
equity of greater than 17 percent
why 17 percent.
Well I checked
and the average return on equity
for the S&P 500 is about
17 percent. So we're gonna say we want ours to be better
than that. Now another option
would be to just go
with the highest in the industry.
That would give us some interesting results as well.
But for now 17 percent.
Now the next criteria is crucial for
what we're doing.
If we're going to use return on equity as one of
our criteria that I believe we should almost
always use a measure of debt
to pair with it.
In this case I'm going to use debt to
equity.
They CNBC keeps this under
the financial strength category.
Now we want debt to equity to be low.
Less debt is better.
So here I'm going to use the
lowest in the industry.
They default this top 20 percent.
And that seems reasonable to me I'm sure we're going to
come up with interesting results.
Now it's important that a debt measure because
we can't forget that return on equity is
calculated by taking profits
and dividing by shareholder equity.
And this this is a formula for
the balance sheet.
And if we were to rearrange this formula Well we
can see that assets
minus liabilities equals
owners equity.
So known that the return on
equity formula is net income
divided by owners equity
well management has two choices
to improve return on equity
grow net income
or lower owner's equity.
You can lower owner's equity by simply taking
out more liabilities more liabilities
smaller owners equity smaller owner's equity
given the same level of net income higher
return on equity.
Now this could be interesting if you ever see
a managements management team
pay structure
or maybe they get stock options
or some sort of bonus incentives based
on perhaps a return on equity
being higher.
If that were the case
well management could simply take up more
debt and drive return on
equity higher without actually improving
the fundamentals of the business.
So we put these two ratios
together and we'll make sure nothing crazies
happen. OK.
Back to identifying great dividend stocks.
Now we can have the dividend yield that we're after.
For that we're going to go with greater than 3 percent.
Then we're going to go add that dividend
payout ratio.
Both of these options by the way on the CNBC
screening tool they're in the dividend section.
Well for the dividend payout ratio this is very
similar to the dividend coverage ratio.
The dividend coverage ratio looks at
how much profit the company has compared
to how much dividends they pay.
The payout ratio is just the opposite
of this. It's dividends divided
by profits.
So for us the lower the dividend payout
ratio the better I'm going to go
with the dividend payout ratio of less
than 60 percent.
This means that for every hundred dollars in profit
the company generates.
Well they could pay out sixty dollars in
dividends.
OK then we're going to add
the five year dividend growth rate.
I'm going to use a five year dividend growth rate
of more than 8 percent.
Why. Well once again I looked at the S&P
500 that's about what they grew
over the past five years.
So I figure one out that seems to work
okay. Now this leaves us
with 15 different companies.
Now one of the things I like about this
type of screen is that this
tends to pull down companies that are somewhat
unique.
And I'm a firm believer
that generally what we want to do
is we want identified companies that are bid
away from the norm.
That's I think we could find the most value in
the most opportunity.
Why would we want to be in the same companies as everybody
else. How much room do they have left to run of
already bought them.
How are we going to outperform now the next step
is actually more time consuming than I can covering just
one video and that is working through
this list of 15 companies
and narrowing it down to the two
or three companies that we like the best.
But there is a trick that I
saw Charlie Munger talk about
and that is he called it invert
always invert.
So the theory there is that
when we analyzing a list of companies like this
what we should do is we should look
at each one and say what could
go wrong
with this company then
what we do is we start crossing companies off
the list based on what we think is
most likely to go wrong.
Keep crossing off the bad ones.
In theory the left
with the good ones.
OK my first thought on this list is
ESCA.
That's one hundred seventy two million dollar company.
They're paying out a dividend.
What for.
Personally I think that that a company
that's smaller should keep the money
and trying to grow the business.
I'm not investing in a small company for the dividend
so I'm going to cross them up.
LND is right in line
with that same thing you're only a 238 million
dollar company.
So we'll cross them out too just
like that. Our list of 15 goes down to 13.
Broadcom is a popular dividend paying stock.
I've looked at them before.
Gap is up there.
I'm curious how that's up there I know the brick
and mortar retail has been struggling.
I wonder what their profit margins look like
what the revenue trends look like.
We know we could quickly
look at the profit margins for each of these companies
I cross a few more off
another way to continue the inversion process
is to look at sectors.
Perhaps our portfolio
already has plenty of exposure to the financial
companies so well we can eliminate
these three if we don't want any financial companies.
Well maybe it's retail that we're fully exposed
to. And if we were to cross retail stocks so
those three companies again.
The point is I think it's easier
and certainly faster to do research
if we're looking for why we shouldn't invest
in a company
and then in theory what we're end up
with is a handful of
possibly the best dividend paying
stocks.
Now if we jump back to the dividend screening
tool for a second.
Well here I think that it's important
to realize that we can play around
with this. Some of these numbers if we didn't
want a 3 percent dividend yield others wanted two
and a half percent but we'd get more companies
raise it up to three and a half percent.
You're likely to lose some companies so
we feel free to play
with these in different areas
has to either make your list longer
or shorter depending on how comfortably
you are with the inversion process
and researching companies in general
either way with this screen.
I like it because what we end up
with is we seem to end up
with companies that are fairly efficient.
We know that because of the ROE criteria
our debt rules should
imply that we're eliminating
at least some of the garbage companies.
We've got a decent dividend yield.
I like the 3 percent number
and we believe that they can cover the dividend
and have the possibility of continue to grow
it in the next few years
with just a bit more research.
While it's possible that we could find
some real gems in this
list or a similar list if we would adjust
the screening process ever so slightly.
That being said are there any criteria
that I left off the list that you would have included.
Let me know what you think in the comments below.
The other thing is that are there any companies
on this list that you think are interesting
because perhaps we could do a video
analyzing some of these stocks
and we could look at how good the
dividend screening process actual
how good to the companies is it's actually
producing for us.
That's the case.
Any ideas on any companies postman comments
below. Whatever gets the most posts I guess
we could do a video on that.
Let me know what you think of the comments below.
Hit the subscribe button.
Thank you for staying with me all the way to the end of the video.
I'll see in the next video.