What is the DSO rating?

One of our most frequently asked questions is “What is the DSO rating?” You’ll see this phrase located in the top right hand corner of our dividend lists. The DSO (Dividend Stocks Online) rating uses the most important data points available to rate the past performance of dividend stocks. These factors include the dividend yield, the 5 year dividend growth rate, the 3 year net income growth rate, free cash flow yield, the payout ratio and the stocks recent change in value.

Each of these criteria can be used to help evaluate stocks on our high yield dividend stocks list.

Dividend Yield

We like stocks with above average yields and therefore give preference to stocks that have a dividend yield of 4% or more. Stocks with a dividend yield over 12% and under 3% receive a slightly lower rating.

5 Year Dividend Growth Rate

The best dividend stocks to invest in are those that have consistent and strong dividend growth. We give preference in our DSO rating system to stocks that have a 5 year dividend growth rate of 5% or more. Stocks that have a negative growth rate are severely penalized.

3 Year Net Income Growth Rate

Income growth drives stocks higher and increases a company’s ability to pay and grow its dividend. Our rating system rewards companies that have a 3 year net income growth rate of 10% or higher. Lower growth rates receive lower ratings and stocks that have negative income growth rates receive no points from this category.

Free Cash Flow Yield

Free cash flow yield is determined by taking the cash flow per share a company is expected to earn divided by its share price. This ratio is used to determine the value of a stock and the sustainability of the dividend. We look for a cash flow yield that is higher than the dividend yield.

Payout Ratio

A stock’s payout ratio is calculated by dividing its earnings per share by its annual dividend. This expresses the percentage of earnings that are paid out as dividends. This is useful to dividend investors because it helps us understand how sustainable the dividend is at current levels. For example if a company has a payout ratio of 95% we should be concerned that they will not be able to maintain that dividend. We give our highest rating to stocks that have a payout ratio under 65%.

1 Year Performance

This one speaks for itself. We calculate the ROI for shareholders over the last year and give our highest rating to stocks that have gained 10% or more. Stocks that have had negative returns receive our lowest scores.

Consecutive Dividend Increases

While we cannot list the years of consecutive dividend increases on every dividend list we do feature it on our safe dividend stocks list. We go back and add points to stocks that have increased their dividend for 25 consecutive years or more.

No rating system is perfect but we believe our DSO rating can help dividend investors as they research income stocks. Our dividend lists are not buy lists or recommendations. Happy dividend hunting!

5 Tips for Better Retirement Investing

Most of us know that investing is a necessary part of a successful retirement. Most of us can’t hope to save up what we need for a successful retirement. Whether you are hoping to use dividend stocks for stable cash flow, or whether you are trying to build up a huge nest egg to live off, just putting money in a savings account isn’t going to provide a large enough return.

You need investments if you hope to boost your retirement savings to a point that offers you sufficient financial resources. If you are trying to improve your retirement investing plan, here are 5 tips that can help:

1. Max Out Tax-Advantaged Accounts

Your first step is to max out tax-advantaged retirement accounts. You can contribute to IRAs and to 401(k)s. There are Roth versions of these plans as well. Contributing to tax-advantaged plans can lead to tax deductions now, or to tax-free earnings later. Whatever you choose, though, the tax-advantage can provide you with a way to put your money to better use. Do what you can to max out the tax-advantaged accounts you are eligible for, and you’ll get more out of your money.

2. Choose Investments with Low Fees

One of the things that can leak away your wealth is fees. Many people waste their money on high-fee funds. Before you invest in a fund, or add anything else to your retirement portfolio, consider the fees. Your retirement nest egg will grow much slower when you are paying a 2% yearly administrative fee. Instead, look for low-cost funds. There are many that have fees of between 0.5% and 1%.

3. Concentrate on Asset Allocation

One of the most important indicators of success for an investment portfolio is asset allocation. Carefully consider your mix of stocks, bonds, cash, real estate, and other assets. Also, remember to periodically rebalance as you approach retirement and your risk tolerance changes.

4. Start as Early as Possible

It’s never too early to start investing for retirement. In fact, the earlier you start, the better off you’ll be. Start investing as early as you can. Even if you have to start small, with only a few dollars a month, just begin. Compound interest works best in your favor the longer you invest. Make sure that you are investing as much as you can, as soon as you can, and your nest egg will grow a little bit faster.

5. Make it Regular and Automatic

In order to find success with retirement investing, you need to be consistent. Invest regularly. You can even make your investments automatic. Have the money deducted from your paycheck. You can also set up automatic plans with many brokers that help you set up automatic debits from your checking or savings account to the brokerage account. Be smart about your investing, and make it a regular thing. You won’t have to think about it, and your money can be working for you.

Earning Dividends in Real Estate: REITs

One of the ways that you can diversify your dividend portfolio, while also providing you with reasonable returns and dividends, is to investing in real estate investment trusts (REITs). A REIT can provide you with the addition of real estate to your investment portfolio without requiring you to come up with a large amount of capital. Plus, REITs pay out dividends.

Brief Overview of REITs

Real estate investment trusts are basically collections of real estate investments. They can be public or private in nature, and the publicly held REITs are traded on stock exchanges much like stocks. This makes them easy to purchase. REITs can include commercial or residential real estate investments, as well as investments in real estate related assets such as storage companies and mortgage providers.

REITs are desirable because of their tax structure; corporations formed them originally with the intent to create a tax benefit. Because of the tax treatment REITs enjoy, they are required to pay 90% of their taxable income out to investors. This means that, in some cases, the dividend yield can be quite generous.

Investing in REITs

Whenever you choose dividend investments, you need to be careful about your efforts, and do your research. This is especially important as you consider REITs. The climate following the relatively recent mortgage market meltdown and the financial crisis of 2008 means that many REITs have been hit pretty hard. They have lost value, and some of them have cut their dividend payouts.

This state of affairs means that there are some great deals to be had, allowing you to find REITs at very reasonable prices. However, you do need to be careful. As you would with any dividend stock, investigate the merits of the REITs you are considering before you decide to invest:

  • Consistent dividend performance: Look at the dividend performance of the company. Look at the pattern of dividend payouts and increases. Consider that solid companies have regular performance, and regular increases. During times of trouble, the prudent REIT doesn’t need to cut dividends as much. Look back: There are some REITs that have been less affected by global real estate market setbacks than others. While future performance can’t be guaranteed by the past, the past can, nevertheless, provide some insight.
  • Reasonable expectation for growth: Look at the holdings of the REITs in question. Is there reasonable expectation for growth? Consider whether or not the REITs you are researching offer the potential for earnings growth as the current economic situation improves. A REIT heavily invested in subprime mortgages might not be your best option, but a REIT that has a reasonable expectation of earnings because of more prudent assets might not be a bad choice.

Now might be a good time to consider REITs. With the US economy, and the global economy, showing some symptoms of recovery, it is possible that real estate could also see some amendment. If this is the case, the REITs in your dividend portfolio could allow you to see regular income – and an increase in that income – as the situation improves.

Why Invest In Dividend Paying Stocks

Many people wonder why dividend paying stocks make such good investments. After all, it doesn’t seem like much to be paid a few cents a share. When a good plan is followed, though dividend paying stocks can be a good addition to any portfolio – especially if you are looking for an eventual source of income. As you invest in dividend stocks, remember that it takes time and patience to build up a solid dividend income portfolio.

Dividends Provide Some Comfort in a Volatile Market

When the stock market is volatile, it usually doesn’t matter what the company is: You will end up with lost value. Dividend stocks are no different; the share price is just as likely to drop in a down market as all the other stocks heading down. The dividend advantage is seen as you continue receiving a payment for your shares. If a company has solid fundamentals, it is likely to continue paying a dividend. This means you still get some benefit – even in a volatile market.

Dividends Often Keep Up with Inflation

According to SagePoint Financial, dividends normally keep up with inflation. Indeed, if you are concerned about inflation eroding your wealth over time, dividend stocks can help you avoid that fate. Plus, companies that pay dividends are often financially sound (unless they are offering a yield that is quite high; that might be a sign of trouble). This financial soundness is likely to stand companies in good stead in the future, and owning them could mean that eventually the stock’s value will rise as well. This, plus the dividends, means that you will most likely go beyond keeping pace with inflation, and actually beat it.

Things to Remember when Investing in Dividend Paying Stocks

It is important for the beginning investor to remember, though, is that dividend investing doesn’t result in immediate money in your pocket. Unless you have a great deal of capital to buy up a large amount of shares, the immediate impact to your finances will be small. Instead, you need to plan for a time frame of seven to 10 years of regular investing to see an improvement in your income, as well as true value gains for the stock in question.

Also, make sure to do your homework. Research is important when you are buying dividend stocks. The top dividend stock membership can help investors identify stocks with solid yields and dividend growth. Make sure that you are comfortable with the company, and that the yield makes sense for the company. If you plan on using dividends for income later, you want to make sure that you have chosen solid companies with a good chance of success.

3 Times to Consider Selling a Dividend Stock

Many of us invest in dividend stocks for the long haul. We expect that we will hang on to the stock, either enjoying regular income from the payouts, or using DRIPs to help build up nest eggs for the future. Few of us think about selling our dividend stocks. However, at times, it is prudent to consider selling your dividend stocks. Here are 3 times when you might consider selling a dividend stock:

1. The Company Cuts Its Dividend – Or Eliminates It

One of the most obvious reasons to sell a dividend stock is if the payout is cut, or eliminated. After all, the point of owning a dividend stock is to receive the regular payouts. When a company cuts its dividend, it means things are going poorly. When a company gets rid of a dividend, it could mean something even direr, and be an indication that you should sell – and get what you can.

Of course, in some cases, the cut might be relatively small, and in response to the economic situation. If a dividend is cut in such circumstances, it might not be a bad thing to see if dividends recover as the economy does. However, if other companies in the sector are raising dividends again, and your stock is left in the dust, perhaps it’s more than just the recession holding the company back.

Also, watch out if the annual yield drops below 1%. That could be a warning sign that it’s time to sell.

2. Your Position is in the Stock is Down Significantly

While many dividend investors don’t worry much about the fluctuations in the stock when they are small, matters can become worrisome if a bigger drop is seen. Day to day, and even month to month, the stock market can be quite volatile. However, if you see a huge drop – perhaps by half or more – it might be time to move on. Even though you invest in dividend stocks for the payouts, you also have to think of your initial capital and your investment. If you are taking a beating that will take you too long to recover from, you might need to sell. Besides, with that kind of drop, a dividend cut probably isn’t too far behind.

3. The Company Changes Management or Ownership

This isn’t always a bad thing. But if it appears that there will be changes made in management or ownership, and you are unsure about the results, it might be time to sell. You might not have a high opinion of the company doing the buying, and that might be an indication that it is time to sell. And, of course, if the sale results in the company going private, dividends are likely to be non-existent anyway. Carefully consider your options in such a situation, and decide what would be prudent for you.