A Step-by-Step Guide to Selecting High-Growth Dividend Stocks

This article, “A Step-by-Step Guide to Selecting High-Growth Dividend Stocks,” offers a comprehensive approach to finding and selecting high-growth dividend stocks that have demonstrated consistent dividend growth in recent years. The article outlines a systematic process that involves using proprietary models to rate and select the top ten stocks from a pool of nearly 400 dividend stocks. Readers will find criteria for selecting high-growth dividend stocks and a step-by-step guide on how to structure a portfolio based on this strategy. Additionally, the article highlights a monthly series that focuses on relatively safe and cheap dividend growth stocks with moderate to high current income. This guide is particularly beneficial for investors in the accumulation phase or individuals with significant investment capital seeking to generate more income than they need. By utilizing criteria such as market cap, dividend yield, daily average volume, dividend growth history, payout ratio, EPS growth, credit ratings, and sales or revenue growth, investors can narrow down their options to a final list of high-quality stocks with strong growth potential.

Understanding High-Growth Dividend Stocks

High-growth dividend stocks refer to stocks that have experienced significant growth in their dividend payouts in recent years. These stocks are favored by investors who are looking for a combination of income generation and potential capital appreciation. Unlike traditional dividend stocks, which typically offer stable and predictable dividend payouts, high-growth dividend stocks provide investors with the opportunity to earn increasing dividend income over time.

Investing in high-growth dividend stocks can be advantageous for investors in the accumulation phase, as well as those with large investment capital that generates more income than they need. These stocks allow investors to reinvest the dividends earned, potentially leading to the compounding of returns over the long term. Furthermore, high-growth dividend stocks can provide a source of regular income for investors who rely on dividends as a primary source of cash flow.

Suitability for Investors

High-growth dividend stocks are particularly suitable for investors who have a long-term investment horizon and are willing to tolerate some degree of market volatility. Since these stocks have a focus on capital appreciation, investors need to be comfortable with the potential fluctuations in stock prices. It is also important for investors to conduct thorough research and analysis before investing in high-growth dividend stocks to ensure that they align with their investment goals and risk tolerance.

Investors who are looking to generate consistent income from their investments may also find high-growth dividend stocks attractive. These stocks offer the potential for increasing dividend payouts, which can provide a reliable stream of income over time. However, investors should be aware that the ability of companies to sustain high dividend growth rates may vary, and it is important to carefully evaluate the financial health and stability of the issuing companies before making an investment decision.

Importance of Dividend Growth History

The dividend growth history of a company is an essential factor to consider when evaluating high-growth dividend stocks. A company with a consistent track record of increasing its dividends over time demonstrates its commitment to returning profits to shareholders. Dividend growth history serves as an indicator of financial strength, stability, and management’s confidence in the company’s future prospects. It also reflects the ability of the company to generate sustainable cash flows and distribute them in the form of dividends.

By analyzing the dividend growth history of a company, investors can gain insights into its financial performance and growth potential. A company that has consistently raised its dividend payouts over several years suggests that it has a strong business model, a competitive advantage, and a history of generating steady cash flows. On the other hand, a company with an erratic or declining dividend growth history may indicate underlying issues or challenges that could impact its future dividend payouts.

For investors seeking high-growth dividend stocks, it is crucial to prioritize companies with a solid dividend growth history. This criterion can help identify companies that have the potential to continue increasing their dividends in the future, providing investors with a reliable and growing income stream.

Selection Criteria for High-Growth Dividend Stocks

When selecting high-growth dividend stocks, investors should consider a range of key criteria to identify promising investment opportunities. These criteria serve as guidelines for evaluating the financial strength and growth potential of companies issuing dividends. By applying these selection criteria, investors can narrow down their choices and focus on stocks that meet their investment objectives. Here are some essential selection criteria for high-growth dividend stocks:

Market Cap

Market capitalization refers to the total value of a company’s outstanding shares of stock. When selecting high-growth dividend stocks, investors may prefer companies with a larger market capitalization. Larger companies often have more stable financials and are more likely to have a history of paying dividends consistently. However, it is important to assess the individual characteristics of each company, as smaller companies can also offer attractive growth opportunities.

Dividend Yield

The dividend yield of a stock is calculated by dividing the annual dividend payout by the stock’s current market price. It indicates the return on investment in the form of dividends. High-growth dividend stocks generally offer a relatively low dividend yield compared to high-yield stocks. Investors should consider striking a balance between dividend yield and dividend growth potential when selecting these stocks.

Daily Average Volume

Daily average volume refers to the average number of shares of a stock that are traded on a daily basis. Higher daily average volume is generally considered favorable, as it indicates greater liquidity and market interest in the stock. When selecting high-growth dividend stocks, investors should prefer stocks with higher daily average volumes to ensure ease of buying and selling when necessary.

Dividend Growth History

As mentioned earlier, the dividend growth history of a company is a crucial criterion for selecting high-growth dividend stocks. Investors should focus on companies that have a consistent track record of increasing their dividend payouts over time. This criterion helps identify companies that have a history of generating sustainable cash flows and a commitment to returning profits to shareholders.

Payout Ratio

The payout ratio measures the percentage of a company’s earnings that is distributed to shareholders in the form of dividends. A lower payout ratio indicates that the company retains a larger portion of its earnings for reinvestment or other purposes. When selecting high-growth dividend stocks, investors generally favor companies with a moderate payout ratio, as it suggests that the company has the capacity to continue increasing its dividends in the future.

EPS Growth

Earnings per share (EPS) growth is an important metric for evaluating a company’s profitability and financial performance. High-growth dividend stocks should ideally have a positive and consistent EPS growth rate over time. This indicates that the company is able to generate increasing profits, which can support future dividend increases.

Credit Ratings

Credit ratings assigned by reputable rating agencies reflect the creditworthiness of a company and its ability to meet its financial obligations. Higher credit ratings suggest lower default risk and higher financial stability. When selecting high-growth dividend stocks, investors may prefer companies with favorable credit ratings to mitigate the risk associated with dividend payments.

Sales or Revenue Growth

The sales or revenue growth rate of a company provides insights into its ability to generate increasing revenue over time. High-growth dividend stocks should ideally have a positive and consistent sales or revenue growth rate, indicating that the company has a strong market presence and the potential to sustain its dividend growth in the future.

Using these selection criteria, investors can identify high-growth dividend stocks that have attractive growth potential and offer a reliable income stream. However, it is important to note that these criteria should be used as a guide and not as the sole basis for investment decisions. Thorough research, analysis, and consideration of individual investment objectives and risk tolerance are essential before making any investment in high-growth dividend stocks.

Additional Selection Criteria

In addition to the primary selection criteria mentioned above, there are some additional criteria that can further refine the selection of high-growth dividend stocks. These criteria help filter out stocks that have provided consistent dividend growth and have a sustainable dividend payout ratio. Here are two additional selection criteria to consider:

Consistent Dividend Growth

Consistency in dividend growth is an important factor to consider when selecting high-growth dividend stocks. Investors should prioritize companies that have consistently increased their dividends over a period of time, such as five or ten years. This criterion helps identify companies that have a track record of maintaining their dividend growth even during challenging economic conditions.

Companies that have demonstrated consistent dividend growth are more likely to have a stable financial position and a disciplined approach to returning profits to shareholders. By focusing on companies with a consistent dividend growth track record, investors can increase the probability of sustained dividend increases in the future.

Payment Ratio Less than 80%

The payment ratio, also known as the dividend payout ratio, measures the proportion of earnings that a company distributes to shareholders in the form of dividends. To ensure the sustainability of dividend payments and potential future growth, investors should consider selecting high-growth dividend stocks with a payment ratio below 80%. A lower payment ratio indicates that the company retains a larger portion of its earnings, which can be reinvested in the business for future growth or used to support dividend growth.

By applying these additional selection criteria, investors can further refine their selection of high-growth dividend stocks, focusing on companies with a consistent dividend growth history and a sustainable dividend payout ratio.

The article continues in the next part.