Investors can make a lot of money if they invest in high quality dividend stocks. They can also lose a lot of money by investing in high dividend yielding stocks if those dividends are not sustainable.
As it’s become clear that low interest rates are here to stay, high quality dividend stocks are harder to find.
We’ve created a model portfolio that helps investors find high quality dividend stocks:
10 Large/Mid Cap & 10 Small Cap stocks that earn our Attractive or Very Attractive rating and offer high quality dividend yields.
*This report is free to all Platinum and higher members and can be accessed after logging in.
Model Portfolio Methodology
Our methodology for this portfolio is simple.
- We only include companies that are earn our Very Attractive or Attractive rating based on our five criteria:
- Quality of Earnings (trend of economic earnings)
- Return On Invested Capital
- Free Cash Flow Yield
- Price to Economic Book Value Per Share
- Market-Implied Growth Appreciation Period
- Dividend Yield greater than 3%
- Positive Free Cash Flow and Economic Earnings
To support sector diversification, we limit the number of stocks per sector on each list to three.
The methodology provides a well-screened group of stocks that also delivers yields greater than the market (S&P 500 yields ~2% while the stocks in our portfolio have an average yield of 6.5%), safety in the sustainability of the yield because of strong free cash flow, and the potential for capital gains as each stock is currently undervalued.
Cash Flow Matters
Companies with strong free cash flow provide higher quality dividend yields because we know they have the cash flow to support the dividend.
Dividend yields from companies with low or negative free cash flow cannot be trusted as much because they may not be able to sustain their dividend for much longer.
In today’s increasingly challenging market, measuring corporate cash flow is increasingly important. Technical trading strategies are losing effectiveness. Good ole fundamental analysis matters more than ever. New Constructs is the best in the business at doing diligence on cash flow.
This article originally published here on October 19, 2016.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
Photo Credit: Chris (Flickr)