Five Ways to Choose Dividend Stocks

Five ways to choose dividend stocks literally describes a key part of my work life.

Roughly once a month, I produce a stock screen that uses five ways to choose dividend stocks and non-dividend investments. I provide the screen to an astute evaluator of equities, Mark Skousen, PhD, an economics professor and presidential fellow at Chapman University, as well as the head of the Five Star Trader advisory service that uses the information.

Mark Skousen, head of Forecasts Strategies and scion of Ben Franklin, talks to Paul Dykewicz.

“Wall Street is more upbeat this week in response to the possibility of a ‘soft landing’ and no recession in 2024,” Skousen wrote to his Five Star Trader subscribers on Wednesday, Sept. 13. “I have my doubts, given the Fed’s tight-money policy, but while we wait for a possible recession in 2024, new opportunities are forthcoming from our latest Five Star Trader screen.”

The latest screen produced 25 stocks that met the stringent requirements for recommending anything in that service. There sometimes are more than 50 stocks but the most recent Five Star Trader screen was thin on total numbers.

Five Ways to Choose Dividend Stocks: Sales Growth of More than 10%

However, the screen produced a modestly valued, high potential educational stock that Skousen quickly recommended within hours of receiving the latest results of the screen. Skousen’s track record in that service has been impressive. The first requirement is that the company achieves sales growth of at least 10% in the past year.

Sales growth is important to achieve profit growth. Indeed, sales provide the fuel for a company’s earnings engine.

The best companies always are growing. This screen ensures stocks that survive the cut are growing at a double-digit percentage or better.

Five Ways to Choose Dividend Stocks: Net Profit Margins Topping 12%

The net profit margin for the screen survivors must exceed 12%. That is no small feat.

The companies need to have strong earnings and the 12% threshold eliminates many contenders. Only the strong survive this rigorous weeding out process.

Plus, earnings support share prices. Without potent profits, a stock can fade even if it has had better days and years in the past.

Five Ways to Choose Dividend Stocks: Cannot Trade Above 30 Times Earnings

The valuation of a stock is important to avoid overpaying. To avoid that risk, no stock survives the screening process if it trades above 30 times earnings.

For example, if a stock trades at six times earnings, it only needs to go to 12 times earnings to double in value.

No one wants to overpay, especially when buying investments. Faddish “momentum” stocks fail to meet this standard.

Five Ways to Choose Dividend Stocks: Earnings Per Share Growth Must Top 25%

Earnings per share growth is an important metric for valuation. The higher the earnings per share growth, the better the prospects for a stock to sustain and boost its share price.

Investors naturally want to turn a profit on investments, so buying stocks with such a high earnings per share growth rate in the past year positions the company to deliver strong results.

This metric also rewards companies that buy back shares to boost their earnings per share growth rate. Just as with net profit margins, earnings per share growth is a key driver of future success.

Five Ways to Choose Dividend Stocks: Short Interest Cannot Exceed 10%

Certain investors specialize in selling stocks short to profit from falling share prices. Many prominent short sellers publicize their negative views on certain companies to push their share prices down further.

A company that has more than 10% short interest could be showing signs of danger. To avoid short selling fallout, the screen rejects any stocks that do not have short selling interest of less than 10%.

The presence of short sellers does not necessarily mean bad news for a stock. I personally invested in Arbor Realty Trust (NYSE: ABR) when certain short sellers were criticizing the company and claiming it was vulnerable to the commercial real estate market softening due to the pandemic-related work-from-home trend.

Since I took the short selling noise in stride and stuck with valuation, the stock has rewarded me. It has risen 2.17% in the past month, 16% in the past three months and 31.01% so far this year as of Sept. 15.

For that pick, I need to credit Bryan Perry, who heads the Cash Machine high-income investment newsletter. He was urging investors to buy the stock while it was on sale due to the short sellers trying to drive the share price down. I paid attention and am glad that I did.

Bryan Perry heads the Cash Machine investment newsletter.

Five Ways to Choose Dividend Stocks: Professor Skousen Shows Success

Skousen uses further personal screening tools to choose his recommendations from the stocks that survive the screen each month. For example, he applied the price/earnings to growth (PEG) ratio to find his latest recommendation that also survived the strict screen.

The PEG ratio is calculated by using a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time. Skousen writes that any PEG ratio under 1 is a “screaming buy.” His latest recommendation showed a PEG ratio of only 0.56. Plus, the stock pays a dividend.

Dividend-paying stocks that have been recommended profitably in Five Star Trader include Apollo Real Estate Finance Income (NYSE: ARI), a New York-based real estate investment trust that primarily originates and invests in senior mortgages, mezzanine loans and other commercial real estate-related debt investments. The recommendation led to a 10.62% in less than three months.

Chart courtesy of www.stockcharts.com

Another prime example of a successful dividend stock transaction in Five Star Trader involved United States Lime & Minerals, Inc. (NASDAQ: USLM), of Dallas, Texas. It has lime and limestone operations and natural gas interests. USLM turned a profit of nearly 4.5% in only 44 days.

Chart courtesy of www.stockcharts.com

The Five Star Trader screen could be especially helpful if the economy slides into a recession, even a mild one. There are times like that when having a formula to pick little-known stocks with a screening system could reward investors, while other equities struggle.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.