How to Buy Dividend Paying Stocks

dividend paying stocks1. Buy stocks of great businesses that have a proven long-term record of stability, growth, and profitability.  There is no reason to own a so-so business when you can own a great business for a very long time.

How to- Only buy stocks with 25 or more years of consecutive dividend increases

Proof:  The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

Data Source:  S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

2. Buy stocks of businesses that pay you the most dividends so you can increase your cash flow from your investments.

How to – List stocks by their dividend yield.

Proof:  The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through 2013.

Data Source:  Dividends:  A Review of Historical Returns by Heartland Funds, page 2

3. When a business is paying out all their profits as dividends, they will have nothing left to grow the business.  When a downturn in the business occurs, they will have to cut the dividend.  Invest in businesses that have much higher profits than they do dividend payments so your dividend payments are secure.

How to- List stocks by their payout ratios.

Proof:  High yield low payout ratio stocks outperformed high yield high payout ratio stocks by 8.2% per year from 1990 to 2006.

Data Source:  High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

4. Buy stocks of businesses that have a history of solid growth.  If a business has maintained a high growth rate for several years, they are likely to continue to do so.  The more a business grows, the more profitable your investment will become.

How to – List stocks by their long-term revenue growth.

Proof:  Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4% per year from 1972 to 2013.

Data Source:  Rising Dividends Fund, Oppenheimer, page 4

5. Search for businesses that people invest in during recessions and times of panic.  These businesses will have a relatively stable stock price that will make them easier to hold for the long run.

How to – List stocks based on their long-term volatility.

Proof:  The S&P Low Volatility index outperformed the S&P500 by 2.00% per year for the 20 year period ending September 30th, 2011.

Data Source:  S&P 500 Low Volatility Index: Low & Slow Could Win the Race, page 3

6. When you are offered $500,000 for a $250,000 house, you take the money.  It is the same with a stock.  If you can sell a stock for much more than it is worth, you should.  Take the money and reinvest it into businesses that pay higher dividends.

How to – Sell when the normalized P/E ratio is over 40.

Proof:  The lowest decile (1/10) of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Data Source:  The Case for Value by Brandes Investment Partners, Page 2

7. When a stock you own reduces its dividend, it is paying you less over time instead of more.  This is the opposite of what should happen.  You must admit the business has lost its safety and reinvest the proceeds of the sale into a more stable business.

How to – Sell when the dividend payment is reduced or eliminated.

Proof:  Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Data Source:  Rising Dividends Fund, Oppenheimer, page 4

8. Have 10 stocks on your list each month.  Rank them in order (highest to lowest).  When you go to invest, buy the highest ranked stock of which you own the least of on the list.  You will be spreading your bets over different businesses as time goes by.  Better yet, you will still be investing in great businesses at fair or better prices.

How to – Buy the highest ranked stock of which you own the least.

Proof:  90% of the benefits of diversification come from owning just 12 to 18 stocks.

Data Source:  Frank Reilly and Keith Brown, Investment Analysis and Portfolio Management, page 213

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