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December 2015 scan – High Yielding Dividend Stock Screening
Did you know the word “dividend” comes from the Latin word “dividendum” meaning “thing to be divided”? Now you do. How do you find high yielding dividend stocks with yields greater than 5% that have a low probability of its dividend being cut in the next year? This is an excellent question. One every equity income investor should know or learn.
You must understand the different types of stocks which pay dividends and secondly why a company cuts its dividend.
The types of stocks which pay dividends are common, preferred, cumulative preferred, non-cumulative preferred, participating preferred, convertible preferred, and callable preferred. Each has its own set of unique nuances. We won’t get into all the nuances, but instead explain the key differences between common and preferred stock.
Common stock dividends are declared by the board of directors usually on a quarterly or semi-annual basic. Over time, a well-managed company will raise their dividend as their profits rise. However, there are times when they can lower or abolish common stock dividends. These are usually times a company becomes less or not profitable. So, common stock dividends are subject to revision up or down anytime. Preferred stock dividends are always paid before common stock dividends are paid. So, they have a preferential (preferred) feature which requires the company to pay them first. Also, many preferred stocks have a fixed dividend which means it cannot be changed. Investing in preferred stocks are one way you can be assured of stable dividend payments in the future.
The other way to find a broad base of high yielding dividend stocks is to screen for stocks using the following criterion.
The average yield for the 25 stocks in the screen was 6.94% as of 12/05/15.
A Dividend Payout Ratio (DPR) under 1.00 is very important. It means the company is paying out less than it is earning. A DPR over 1.00 means just the opposite. Company’s paying out more than they earn are likely to have its dividend cut in the near future. Investment professionals look for DPR of 0.70 or less for some assurance of stable dividends from a company. This also gives the company leeway should they experience a short-term drop in profits. There are no guarantees dividends won’t be cut, but by screening for stocks with these criteria you will limit the probability of dividend cuts.