The Best Stocks to Buy for Dividend Investing

The best stocks to buy differ for each type of investment strategy. There are strategies like day trading where traders buy into a position during a trading day and then sell the entire position before the market closes for a profit. Then there are investors who buy and sell stocks using technical analysis and try to time when to enter and exit a position. Some investors trade options which can provide higher returns while others invest in mutual funds and allow fund managers to build their portfolio. Because of all these different strategies, the best stocks to buy will vary widely depending on the strategy.

One popular investment strategy is to build a dividend paying stock portfolio which can provide a long term income stream. Since there are many stocks that pay dividends, it is important to find the best stocks to buy for this type of strategy.

One of the first things to consider when narrowing down the list of best stocks to buy is the current yield of the stock. Is a High or Low Dividend Yield Better? Generally speaking, lower yields are actually better as they present less risk and exposure in the market. A high dividend yield is usually a sign of a future dividend cut or a payout that will not be maintainable for the long term.

Many investors were burnt back when the sub-prime mortgage crisis hit the banks. Several banking stocks offered dividend yields around 10% which may seem like a great investment. However, the market was actually telling us the companies would not be able to maintain this payout. What happened? Banks had to cut their dividends sending the yields back down below 5%.

A good rule of thumb is to look for stocks with a dividend yield between 2.5% and 6% for the most stable investments.

If you want to build a long term dividend portfolio, then it is important to consider the history of the company’s dividend performance. Have they had a history of raising dividends annually for many years? If the answer is yes, then there is a good change this trend will continue. Stocks found on the dividend aristocrat index, for example must have raised their payout annually for at least 25 consecutive years. While the past is no guarantee of the future, it is a positive sign and a way to identify the best stocks to buy for dividend investing.

A good benchmark to start with is to look for dividend paying stocks that have raised their distributions for at least the past 10 years.

How much is a company’s earnings going towards maintaining the dividend? While having a solid history of raising dividends each year is important, it shouldn’t be at the expense of growing the organization. The dividend payout ratio is a way to tell how much of a company’s earnings are being used to pay the dividend. If the ratio increases from year to year, it means the company has to use more and more of its profits to meet the dividends demands of its shareholders.

Play it safe and look for a payout ratio that is 50% or less of earnings.

A popular financial ratio used to find the best stocks to buy is called the P/E (price-to-earnings). This ratio is a representation of the current share price of a stock in relation to its earnings per share. To find the best stocks to buy that pay dividends, it is important to not overpay. These are not growth stocks we are talking about. They are established blue chip companies that can be bought when the market declines at a discount.

A good rule of thumb is to look for stocks with a P/E ratio of 20 or below. Anything above that is probably a stock that is overpriced in the market.

These is no exact science or method for selecting the best stocks to buy for dividend investing. Using financial calculations like the dividend payout ratio, current yield, and price-to-earnings ratio can help investors narrow down a list, but is no guarantee. Factoring in the historical dividend increases can also make it easier to find the best possible stocks to buy.

Investing in the stock market carries risk. Whether you are a day trader or dividend investor, there are no guarantees. However, if you can develop a strategy and stick to it, then you can reduce any potential risks in the market and find the best stocks to buy.