Here’s how to pick dividend stocks to maximize your income and capital gains

high dividend investments

Learning how to pick dividend stocks successfully is a lot easier if you follow these key tips—and warnings

Do you know how to pick dividend stocks for maximum gains? For a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because these firms have left themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

All in all, a track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.

How to pick dividend stocks: Well-established companies with a strong hold on a growing market are a great place to start

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.


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How to pick dividend stocks: Look for these two key financial factors to take advantage of dividend investing for the highest overall returns

As mentioned, dividend history is a very important way to judge the worth of a dividend stock. Ideally, you should look for dividend stocks that have been paying dividends for 5 or more years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. In fact, if you only buy dividend-paying stocks, you’ll avoid most frauds.

Meanwhile, you’ll also want to ask: What is the dividend stock’s debt load like? Would it have a hard time recovering from an economic downturn? The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

How to pick dividend stocks: Find dividend stocks with share buyback plans and that will add to your gains

Stock buybacks raise a company’s earnings per share. It’s simple arithmetic: buybacks reduce the number of shares outstanding. To get earnings per share, you divide total earnings by the number of shares outstanding. When you reduce the divisor—because the company has fewer shares outstanding, due to stock buybacks—the calculation gives you a higher number for earnings per share as an answer. On the whole, buyers are willing to pay slightly more for a stock with slightly higher earnings per share.

Furthermore, when the company engages in stock buybacks, it bids up the price of the stock.

The advantage of stock buybacks expands all the more if you hold off on selling until you need the money. That holding period may last until you retire, when your income tax rate is likely to be lower. On the other hand, taxes on dividends are payable in the year they are received.

Be wary of using economic forecasts as part of your dividend stock analysis

You need to avoid putting too much faith in the stock market as an economic forecaster. Sometimes the market gives advance warning about coming recessions and economic bubbles. Other times, it predicts economic bubbles that never come. (This, by the way, is true of any economic forecast.)

Up to a point, national and world economies are self-correcting. They rise and fall in a series of spurts and setbacks. The setbacks always show some sign of turning into recessions. They rattle investors and upset the market. But few ever lead to serious, lasting damage.

The most experienced, successful investors feel skeptical, if not downright cynical, about economic forecasts, for three reasons:

  • Fame as an economist has little to do with forecasting skill.
  • Accurate economic forecasts are rare—certainly rarer than profitable stock market recommendations. There are simply too many economic factors interacting in too many ways. That’s why nobody guesses right every time, and even the best economists can be right on in one year and dead wrong the next.
  • Even when an economic forecast is right, it still may not offer helpful investing advice. That’s because the stock market anticipates economic trends much better than any economist, and moves up and down ahead of them.

Use our three-part Successful Investor strategy as part of learning how to pick the best dividend stocks

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Does a company paying a dividend impact the stock’s overall price or the interest you have in that stock?

Do you keep dividend stocks to bolster your portfolio in case of an economic downturn?

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