How to Invest in the Best Dividend Paying Stocks with The Least Risk

One of the reasons why dividend paying stocks are usually safer than others is dividend stocks are usually value stocks. The reason for this is because it takes a company many years usually before they have reached a stability in the market place where their income and growth is fairly consistent. At this point their bigger growth years are behind them and so they begin rewarding investors with cash from their sales and income. This is giving out as a percentage of of the stock price usually, known as the dividend yield.

Not that you can't find dividend growth stocks but these are rare and they have a lower track record than the more traditional value based dividend stocks.

One of the things I like to look for in dividend stocks is how long the company has been giving out dividend stocks. Obviously, the longer the company has been giving dividends then the safer they are. So that is something to consider. Let's look at this more closely.

So the first thing I like to look at when limiting my investing decisions to the top 10 best dividend paying stocks is how long they've been paying dividends. I like to filter stocks which have been paying dividends at least 10 years or longer.

In fact, you might not know it, but there are several stocks on the American exchanges that have been paying dividends for over 50 years. The problem with the longer paying dividend stocks is that they are very well known companies like 3M for example. That's not the problem. The problem is that because they are well known they usually aren't easy to find at a discount.

When I'm looking to buy dividend stocks, I am looking at both a growing income through dividends and growth through stock appreciation. To get growth through stock appreciation, you need to buy stocks at a discount. A quick way to find stocks at a discount is by dividend yield. The higher the dividend yield the cheaper the stock is usually.

So we're looking at dividend stocks rather than high paying dividend mutual funds because if you do your research, it is both safer and more profitable in my opinion. So we've found dividend producing stocks that have been paying dividends for longer than 10 years and we're looking for high dividend yields so we can find them on the cheap.

Well, what is a high dividend producing stock? That changes depending on the market. So the first thing you want to do is find out what the average yield of he S&P 500 is for example. You can find the current dividend yield of the S&P here. As I write this it is at about 2.3% which is historically low.

You can find some great dividend bearing stocks by just sticking to the 500 stocks of the S&P. Just about all of them are dividend producers. If you go larger than that you'll need a stock screener and this method is about being able to find the best paying dividend stocks using free and manual methods.

So the next question is how do we find stocks that have been paying dividends for the longest time. Or at least those that have been paying out for at least 10 years. That brings us to the next module.

So the first website was very helpful in helping us gauge what the average yield in the S&P 500 is. We want to do better than that so we can find stocks that are both cheap and pay a high dividend. This will allow us to see improved income from the dividend over time as well as growth as the stock price appreciates to where it should be. We're buying it on the cheap.

Well, an easy way to look for long paying dividend stocks is to look at the Dividend Aristocrats or the Dividend Achievers' lists. I prefer the Dividend Achievers because they are the stocks that have paid dividends for at least 10 years. You can look at the Aristocrats too, but that is a smaller list of stocks that have been paying dividends for at least 25 years.

Currently there are 50 members on the Achievers list, so what I do, is go through that list in a spreadsheet and list them in order of dividend yield. I find this information by going back to this site here. As I write this there are over 20 stocks that have dividend yields of 5% or greater, but not all of those will be on the Achievers list.

List out about the top 20 to 25 if you like. This shouldn't take you longer than about an hour or two. Join me for some last thoughts on actually picking from this list.

So now you have a list of 20 or so high paying dividend stocks. And my guess is that all 20 or so will be paying more than the market's dividend yield. Now how do you choose amongst these juicy paying dividend stocks?

Here is where you have to dig deep and use your own common sense and research. I take my list of stocks and I put them through Yahoo Finance and I look at a few things.

I like to see that management owns a good chunk of the stock. It comforts me when I know that the guys or gals running the show are invested in the business they're running. They're eating their own cooking so to speak. I like to see at least 5% management ownership of the stock.

I also like to see low debt too. This is very important during hard times. There are many ways to assess debt, but one of the quickest and easiest that I like to use is the current ratio. This is the companies current assets divided by the current liabilities. It gives you an idea of how easily the company can pay off their short term debt. Obviously a ratio under 1 is very dodgy. Personally, I like to see a ratio of over 2.

Lastly, do I understand the company's business? Does it make sense to me? If I'm investing in the business I'm becoming an owner in it so I want to know how it works. The easier it is to understand the better.

So that's what I look for in a nutshell when investing in dividend stocks. It's worked pretty well for me so far. Hope this helps for you too. Remember investing is full of ups and downs. You can lose money investing in dividend stocks, but I believe that if you invest carefully in good companies with low or no debt you'll do well in the long run.