How to Buy Dividend Paying Stocks

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Stocks that pay dividends are a great way to get recurring money. How to buy dividend paying stocks--and how to find them.

The stock of any company worth owning eventually makes money for its shareholders. Some companies reinvest their profits in the companies themselves. Other companies acquire smaller companies. Some companies pay dividends.

A dividend is a small payment of earnings paid to shareholders in proportion to the amount of stock they own. It's like the interest you earn on a savings account. You've invested in something that makes money and you're entitled to some of that money. Dividends are attractive for investors who make a living off of their investments. Rather than buying and selling stocks in hope to make a profit on a monthly, quarterly, or yearly basis, dividend investors rely on checks every few months. The best stocks pay every quarter.

How Do You Find Dividend Paying Stocks?

Not all stocks pay dividends, and not all stocks which pay dividends are worth owning. In fact, some stocks which pay dividends do so to prop up a failing share price. Fortunately, public companies available on public stock markets have to announce their financial information (see the SEC's EDGAR public company database)—which means it's available to anyone who knows how to use tools effectively.

Using Google's Stock Screener

A stock screener is a tool to search for stocks by various financial attributes and criteria. This can help you find stocks that pay dividends by searching for stocks with a decent dividend yield.

The Google Finance Stock Screener is free, effective, and easy to use. On that page, you should see a form with several criteria. You need at least the P/E Ratio and Div yield (%) criteria. (If you don't see those, click on the Add criteria link. Under Valuation, select P/E Ratio and under Dividend, select Div yield (%).)

These little selector boxes let you set minimum and maximum values. In the dividend yield box, set the leftmost value to 2 and the rightmost box to 100. This will look for all stocks which pay dividends worth between 2% and 100% of the current stock price. You're unlikely to find a stock paying a 100% dividend rate, and 2% is about as low as you want to go. (A really good company like Coca-Cola might pay a dividend rate of 2 or 3%.)

In the P/E box, set the leftmost value to 0 and the rightmost value to 18. This will look for all stocks where the current price is between zero and 18 times more than the company earns in a year. The historical average for stocks in general on the S&P 500 index tends to be around 15, so you'll have a lot of options. A stock with no earnings—or a stock that's wildly overpriced for its earnings—won't appear, which is good. You're trying to exclude lots of stocks now.

When you finish setting your results, you'll see a table containing the details of several hundred stocks. The names of the columns of that table will contain the criteria you selected. Click on the Div yield (%) header to sort the table by the highest dividend yield.

Now you have a place to start looking for stocks which pay good dividends. Play around with other criteria. In particular, you might be able to narrow down results by setting a minimum market cap of 200M or more. This will exclude smaller companies which may be more volatile or be harder to buy and sell. For example, the top stock by dividend yield at the time of this writing was Oi SA, a Brazilian telecommunications stock. Click the stock symbol to go to Google Finance's detail page.

Analyzing Dividend Paying Stocks with Trendshare

Not every stock with a high dividend yield is worth owning. Some of them might even be overpriced. That's where your value investing research comes in. As with any other stock worth owning, you should be able to come up with a plausible story about what the company does, why it's worth the price, and how it'll continue to make money year after year.

Once you've found something you like in the Google screener, go to the Trendshare stock search page and search for the company's symbol. For Oi SA, search for OIBR. If Trendshare has already analyzed the stock, you'll get our analysis, including our recommendation whether or not to think about buying it. If we haven't analyzed the stock yet, we'll put it on our list and try to get you an answer in the next few minutes.

Obviously we don't have all of the answers about all of the values, but with a little bit of automatic financial analysis, we can tell you whether the company looks like it might be worth owning. If not, we'll tell you and you can move to the next potential stock.

How to Get Dividends

Once you've found some likely candidates, go to your discount Internet broker, deposit some money, and purchase your stocks. Done! That was easy.

Then you wait. Keep in mind that companies which pay dividends will announce that dividend several weeks before they pay it. They'll also announce the day on which you must hold the stock to be eligible to receive the dividend (the ex-dividend date). Once you've purchased the stock (before the ex-dividend date), sit back and wait. You'll get your dividend. If it's a good stock, this will be the first of many.

Are High-Dividend Stocks Worth It?

In our personal portfolios, we consider a stock with a three monthly dividend check a bonus. It's not the only reason to own a stock, but many good stocks do pay good dividends. It's more important to us to own stocks in great companies than to chase a dividend of 6% or 8% or 10%; far too often those high dividend yields are from companies with real financial troubles, and those yields won't last.

With that said, sometimes the market really does offer you a good discount on a great stock. A great stock at a good price with a good dividend is a real find. A dividend yield of 2% combined with a company that can increase its value by 10-12% annually is really nice to have. Stocks that pay dividends are easy to analyze in terms of the value they provide you; they should be one tool in your investing toolkit.

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