How to Screen for Dividend Stocks
To screen for dividend stocks, filter on payout ratio and dividend history before filtering on yield. A high yield is arithmetically the same whether the payment rose or the price fell, and the sustainability filters are what separate those two cases.
A dividend screen is unusually easy to build badly, because the most obvious filter is the most misleading one. Yield is a ratio, and it goes up when the price goes down.
Before you start
A payout ratio ceiling, because yield alone selects for companies that cannot sustain it. A company paying out almost everything it earns has nothing left when earnings dip.
Liquidity filters set before any yield filter. Minimum price and average volume. The highest-yielding names skew small and thinly traded.
A decision about whether you want income now or income that grows. A high current yield and a fast growing payment are usually different companies.
The steps
1. Set liquidity and size floors
Minimum average volume and a market capitalisation floor. This alone removes a substantial share of the apparent bargains, and it removes them for a reason.
2. Filter on payout ratio before anything else
Dividends divided by earnings. A ceiling here is the single filter that most changes the quality of the output, because it excludes payments that depend on nothing going wrong.
3. Require a payment history
Ten years of uninterrupted dividends, or a record of increases. This is the strongest single indicator available in a screener, because cutting a dividend is a decision companies avoid.
4. Check cash flow covers the payment
Dividends are paid from cash. A payout ratio that looks comfortable against profit and uncomfortable against operating cash flow is the more informative of the two comparisons.
5. Only now look at yield
With sustainability already filtered, yield becomes a useful ranking. Applied first, it sorts the list by whichever share price has fallen furthest.
6. Set an upper bound on yield as well as a lower one
Exclude anything far above the market’s typical range. A yield several times the norm is generally the market pricing in a cut that has not been announced.
7. Check the growth of the payment
Over a long holding period a modest dividend growing steadily produces more income than a high one that never moves, and the second is far more common among the highest yielders.
How to tell it worked
Liquidity filters were applied before any yield filter.
A payout ratio ceiling is set, and coverage was checked against cash flow.
Payment history covers at least 120 months without interruption.
And yield has both a floor and a ceiling, so extreme values are excluded rather than ranked first.
Why yield is the wrong first filter
It rises when the price falls. A company whose shares have halved on bad news shows double the yield it did last month, and the screener presents that identically to a company that raised its payment.
It is also backward-looking. Most screeners compute yield from the last twelve months of payments, so a dividend already cut can still show at its old level for months.
What a cut actually does
The income stops or shrinks, which is the obvious part. The less obvious part is that the share price usually falls at the same time, because the buyers who held it for income leave together.
Which means a dividend cut is two losses arriving at once. This is why the sustainability filters matter more than the yield filter — they are protecting against a correlated outcome rather than an isolated one.
And a company under pressure will defend the dividend for as long as it can, sometimes by borrowing. A payout ratio above 100% funded by debt is visible in a screener and is not a stable situation.
Two screens, not one
A current-income screen wants a decent yield that is well covered. A moderate payout ratio, a long history, coverage from cash flow, and a yield above the market’s average but not far above it. The output is usually large, established companies in unexciting industries.
A dividend-growth screen wants the opposite starting point. A low current yield, a low payout ratio, and a record of raising the payment every year. Those companies pay little now precisely because they are retaining earnings to grow, and the retained portion is what funds the future increases.
They very rarely overlap. A company already paying out most of its earnings has nothing left to grow the payment with, which is why the two screens select almost disjoint sets.
Decide which one you are running before you set a single filter. Trying to satisfy both produces a narrow list of compromises that does neither job, and the filters will quietly resolve the conflict in whichever direction the data happens to allow.
The original data
Of the 24,971 unique videos in research/search-study-corpus.jsonl, 39 mention dividend stocks in the
title, at a median of 17,945 views across 33 channels, and 36% of those are instruction-shaped.
Dividend investing as an approach appears in 194 at 7,535 and dividend growth in 19 at 4,380. The counts
come from site/corpus_count.py and site/rank_investing.py.
39 videos at 17,945 against 194 on the approach at 7,535. A fifth of the coverage and more than twice the audience per video, which suggests people arrive wanting a list rather than a philosophy.
The answer to the question on that chart is that the yield jumped because the price fell. The payment has not changed and the market has repriced the likelihood that it continues — which is information about the dividend rather than an opportunity to collect it.
When it fails
The failure is sorting by yield descending, and it puts the worst candidates at the top of the screen. The names at the very top are almost always companies whose share price has just fallen sharply, because that is the only fast way for a yield to become extreme. The screen has ranked the list by recent bad news and presented it as a ranking by income, and every name at the top is there for the reason you would have excluded it.
The second failure is no payout ceiling. Unsustainable payments dominate.
A third is coverage measured against profit only. Dividends come from cash.
A fourth is no payment history requirement. It is the strongest available signal.
A fifth is skipping liquidity floors. High yields cluster in thin names.
And a sixth is ignoring dividend growth. Over decades it outweighs the starting level.
Related
Dividend investing covers the approach and its horizon. Dividend stock is what the screen is looking for. And income investing is the broader category this sits inside.
Yield is a fraction, and I kept forgetting that a fraction rises when the bottom falls. The screens that produced my worst results were the ones sorted by yield descending — that sort puts the companies whose share price has just collapsed at the very top, which is the opposite of what I was looking for.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.