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Friday, May 20, 2011

How to Analyze a Dividend Stock

You've read about the attractiveness of dividend paying stocks, especially in an environment of historically low interest rates. As a do-it-yourself investor you want to pick your own stocks. How do you analyze this sector?

Fortunately, you don't have to reinvent the wheel.  At your fingertips are some really great approaches. Here's one by "Dividend Growth Investor" as revealed in his analysis of  3M. These are some of the things he looks at:

  • sector (important to ensure that diversification is kept at the forefront)
  • is it a "dividend aristocrat" ? (member of the S&P 500 that has longevity and consistency in raising dividends
  • major competitors (GE et. al.)
  • annualized return over 10 years ( 8.6%...double investment in 8.4 years!)
  • earnings per share growth rate for current year and 12 months ahead (graph of earnings per share)
  • return on equity over 10 years (graph - shows return has consistently exceeded 27% over the decade)
  • dividend payout over 10 years (graph )
  • dividend payout ratio ( sustainability indicator)
There is much more in his analysis including important commentary on 3M's R&D spending, entry level target etc. All-in-all Dividend Growth Investor provides an excellent approach to analyzing dividend stocks. 

As always I recommend limiting investments in single names (stocks and bonds combined) to 5% or less of investable assets.

Disclosure: This post is intended solely for educational purposes. Individuals should do their own research or consult professional advice before investing.


  1. The 5% rule is a good one to stick to!

    Buy hey, I always thought you were a pure ETF guy! :)

  2. re: MoneyCone I recommend ETFs as the way to go but understand that many diyers prefer to invest in individual stocks. As long as they have the time, resources, and feel they have the knowledge (including the ability to control their emotions), and understand the odds are against them then go for it I say.
    I prefer to see people confine it to at most 20% of their retirement assets. Up to 80% should be ETFs.