Here's How to Find the Best Dividend Stocks

The reasons why it's smart to include dividend-paying stocks in your portfolio are many. Just remember that not every dividend-paying stock is equally promising -- and those with higher yields are not always better than ones with lower yields. Let's take a look at how to find the best dividend stocks.

Why dividends?First, though, a reminder of why you should consider dividends for your portfolio. For starters, they generate income, which is obviously welcome in retirement, but it can also be welcome when you're younger, as dividend dollars can be reinvested in additional shares of stock, building your nest egg. When the market is in a slump, healthy and growing companies will usually keep paying their dividends, offering some relief in challenging times. And here's something underappreciated: Dividend payers actually tend to perform really well, too. According to Ned Davis Research, for example, dividend-paying stocks averaged an annual gain of 9.3% from 1972 through 2014, while non-dividend payers averaged just 2.6%. Want more? According to Fidelity data, from 1993 through 2014, dividends accounted for about 40% of the 10.3% average annual return of the S&P 500.

Finding the best dividend stocksOnce you're convinced of the value of dividend stocks, how should you go about seeking the best ones? As with any stock candidate for your portfolio, you'll want high-quality companies, with sustainable competitive advantages and great growth prospects. You'll also want them to be attractively valued, as paying too much for a great company isn't a recipe for success. When it comes to the dividend, though, focus on the yield, the dividend growth rate, and the payout ratio.

Source: The Motley Fool