Simple Ways to Analyze Dividend Stocks

If you look at my portfolio, you will notice that the majority of my holdings are individual stocks. At the same time, based on my conclusion article about the perfect portfolio, I should increase my holdings in low cost index ETFs.

The reason I have not done it so far is that I find the stock markets (more the US, less the European) overvalued. In such situation, so far I found it more appropriate to select individual stocks from the US market that I find relatively cheap, and which I wouldn’t mind holding for years.

Due to the recent high valuation of the American markets many people might think the same way, so I thought it could be useful to share some basic methods I use for analyzing dividend stocks. At the end of the day I can’t let all the work to be done by the dividend elves šŸ™‚

I personally find Morningstar very useful for such purposes. Here I find all the most important metrics I need for my basic stock analysis. Let me demonstrate it via Ameriprise, which is currently one of my biggest holdings.

Basic Dividend Stock Analysis

Dividend Yield


One of my aims is that after a couple of years my portfolio should be able to generate sufficient passive income, which would support me and my family during the years of early retirement. Because of this reason, the dividend yield is an important metric for me.

I don’t really care about yields below 2%, as I could get such income with much less risky investments. Above 2%, the smaller the yield, the larger growth I require from the company in the future.

Of course the dividend yield is not everything and it worth noting if the dividend payment is not sustainable. In fact, chasing the yield only is one of the biggest dividend investing mistakes. We need to make sure that we can rely on these dividends also in the future. In order to do this, we have to check other metrics.

Earnings Per Share (EPS)


If you go to the “Key Ratios” section at Morningstar, you will see tons of useful information (see above). One of these is the EPS. Very simply speaking, the more a company earns, the more it can pay as a dividend.

I generally want to see a nice, increasing pattern here. Of course there can be some better and worse years (just look at what happened to the EPS during the financial crisis in 2008), the more important is the trend itself.


This shows how much dividend the company pays per share. Once again, I want to see an increasing number here. What has happened during the financial crisis is also a good indication for the future.

As you can see, AMP has managed not just to maintain, but also increase its dividends during 2008 and 2009. For me this is suggesting that in the future I can rely on the dividend payments and shouldn’t worry about cuts, as long as there is no big problem around the company.

Payout Ratio

This shows how much percent of the company’s earnings is paid out in dividends. The smaller the number, the better it is, as it shows that there is still room for dividend increase. As a rule of thumb, I want to see this number below 50-60%.

Number of Shares

Buying back own shares is another way for companies to return money to shareholders. The same amount of shares you own will represent a higher percentage in the company. Also, even with unchanged earnings, but less amount of shares, the company’s EPS would increase.

This is why I like to see decreasing amount of shares over the years.


Of course identifying a stable and promising company is only half of the task. You want to buy the shares for a good price. That’s where valuation comes in the picture.

The valuation tab of Morningstar gives you a good overview on some valuation metrics, which you can compare to the industry average, the S&P 500 and the company’s 5 years average.

If based on these valuation metrics I find the stock expensive, I don’t buy it, no matter how stable I find the company. A good example nowadays is Johnson & Johnson. It’s a great stock with stable dividends, AAA credit rating. I would love to have it in my portfolio, but I simply find it too expensive at current levels. At the same time if the share price would drop back around USD 100, I wouldn’t hesitate buying.


Johnson & Johnson Valuation


Of course the above points are only basic methods to analyze dividend stocks. Nevertheless by looking at these few metrics would already give you a clearer picture about a specific company.

How about you, dear readers? What kind of method you use for analyzing dividend stocks? It would be interesting to read your thoughts as well.


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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.


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