As most investors will tell you, finding good stocks to buy can be a daunting task. Just because a company has been around for a long time does not mean it can be considered a quality investment. Look at what happened to General Motors, Bank of America, and Enron in recent memory. At one point in time, all of these companies were considered some of the best stocks to own.

While picking the best known companies doesn’t always translate into a sound investment, there are some ways to find good stocks to buy. One of the best opportunities to find the best investments is to build a list of dividend paying stocks that you can use to further your analysis. Dividend paying stocks come in all shapes and sizes and often are quality investments.

Many of the top dividend paying stocks have similar things in common. Since they are able to distribute a payment back to their investors, it normally means they have a strong financial position and are well managed. Companies that display a strong history of dividend increases for many years are some of the best run organizations in the world. These are usually good stocks to buy when it comes down to it.

Here are some common characteristics of dividend paying stocks that make for some of the best stocks you can invest in.

• Low P/E ratio compared to the rest of the stock market.
• History of consistently raising dividends each year.
• Moderate to strong projected earnings growth rate.
• A dividend yield that remains between 2% to 6%.

Do Your Homework

While using dividend stocks to identify good stocks to buy can really help your investment decisions, you still need to do your homework. For every great dividend stock investment, there is at least one bad stock that you will want to avoid. That is why it is always important to complete your due diligence on any investment before you decide to buy or sell a stock.

As an active dividend investor, I am aware of the large number of high yielding stocks to choose from. There are some high dividend paying stocks that are very risky investments. On the other hand, there are plenty of strong dividend stocks that are from well managed companies with healthy balance sheets.

So how does an investor identify the best dividend paying stocks? Finding these top stocks requires a little patience and investigation of several factors. It is not a simple task investing in dividend stocks. Instead, it takes some time and effort to be a successful trader.

To help get you started, check out the following characteristics that can help you find the best dividend paying stocks.

Characteristics of the Best Dividend Paying Stocks

1. Strong History – The best dividend paying stocks are always the ones with a strong history. Look back at the past 25 years of a stock’s fundamental and dividend performance. Do they have a strong history of raising their distributions every year? If so, then they are more than likely a company you will want to pay attention to moving forward.
2. Low P/E – The best dividend paying stocks should have a price per earnings ratio that is less than or equal to 20. This number may vary depending on a particular sector or industry. It is also important to look at the company’s future P/E ratio projection as a sign of what is in store for the future.
3. No Dividend Cuts – Companies that have cut a dividend distribution in the past may not be the safest investment. Having a reputation of few dividend cuts is a good sign of a stable company. Maintaining and periodically increasing dividends is a sign of strong management which is always important.
4. Modest Dividend Yield – Create a list of dividend paying stocks with a yield between 2% to 6%. You can adjust your dividend stock screen based on your preferences, but many experts try to stick between this range. Anything less than 2% may not be worth the investment, while anything over 6% is probably going to lead to a questionable investment. The best dividend paying stocks usually will fall somewhere in this range.
5. Earnings Growth – When it comes to finding the best dividend paying stocks, strong earnings growth is critical. Stocks that are the dividend leaders should have a projected earnings growth greater than 10% for the next 5 years. This number can be adjusted to meet your needs but is a good point of reference to start your search.

Picking the Best Dividend Paying Stocks

There are plenty of strategies to becoming a successful dividend investor. The one common theme found across all long standing investors is owning the best dividend paying stocks possible. While the definition may vary between investors and experts, the 5 characteristics identified above are found in each and every investment!

One of the hardest parts of becoming a successful dividend investor is filtering out the bad stocks from the good ones. If it were easy, then everyone could run out and start chasing the highest dividend paying stocks based on yield and retire early. Unfortunately, it doesn’t work that way – NOT even close! Building a solid portfolio of dividend paying stocks does not have to be that difficult and there are ways to limit your risks.

One of the best methods for success is putting together a list of dividend paying stocks that can be used as your investment guide. There are plenty of ways to identify your list of stocks, which include running a stock screen, reviewing ETF dividend paying stocks, researching other published lists of dividend stocks, etc. The point is that there is no right way to build your list. The lessons that you learn from the exercise are priceless and can be used to help shape your investment career.

Create a List of Dividend Paying Stocks

Here are 10 great reasons why creating your own list of dividend paying stocks is a good idea.

1. Analysis – Creating a list of dividend paying stocks indirectly requires an investor to think about a stock before making a purchase.
2. Hidden Gems – There is a strong chance you will come across a dividend paying stock that you had never thought of in the past.
3. Diversification – Reviewing more than one high yielding stock will make an investor want to diversify after seeing the various companies that offer dividends.
4. Removes Distractions – Working on a building a list of dividend paying stocks can help remove market hype and distractions that go on all the time.
5. Eliminates Bad Stocks – Comparing a strong dividend paying stock versus an unhealthy company will force you to pass on the bad stock when making investment decisions.
6. Education – Finding the best dividend paying stocks to add to a list will help you educate yourself on investing in high yield securities.
7. Sell Signals – Continually updating your list of dividend paying stocks will provide you with early sell signals and warnings on a stock.
8. Define Search Criteria – Overtime, you will be able to define and update the search criteria used to identify dividend paying stocks.
9. Compare with Experts – Putting together your own list of dividend paying stocks and comparing against the experts (i.e. S&P 500 Dividend Aristocrats) will help validate your analysis.
10. Build Credibility – If you have a blog or website, then creating your own list of dividend paying stocks can build your credibility as an industry expert.

Building Your Dividend Investment Plan

Creating a list of dividend paying stocks is not going to immediately make you rich, nor will it reduce any risk in your portfolio. It is only part of an overall strategy that all investors should follow in order to create a trading plan. As with most things in life, having a plan and set of goals is crucial for your success as a dividend investor.

There is no right or wrong way to find your dividend stocks. Maybe you can implement a successful strategy from buying and selling the riskiest dividend stocks available. As long as you have a plan that can be updated periodically and executed, you should have a long career as a dividend investor!

There are plenty of places an investor can look to find a list of dividend paying stocks. There are published lists like the S&P 500 dividend aristocrats that can give you a quick glance of the top dividend paying stocks available. An investor can also run their own stock screen to build a solid list of high yielding stocks that could lead to potential investments.

There is another option that will allow investors to effectively identify a list of quality stocks that pay dividends with very little effort. Reviewing ETF dividend paying stocks can help investors build their own list by reviewing the top holdings within the fund. The hardest part of the process is finding the ETF’s (also known as Exchange Traded Funds) that deliver high yields. Once you have identified a few top ETF dividend paying stocks, take a look at the top holdings to build your list.

Reviewing ETF Dividend Paying Stocks

As a quick exercise, let’s review the holdings of 5 popular ETF dividend paying stocks. The list that we will review includes the following ticker symbols – SDY, DVY, PEY, PFM, and FVD.

Now that we have identified the 5 ETF stocks we plan to analyze, the next step is to review the top holdings. Most online financial websites will provide data on the top holdings of an ETF. You could also check with your online discount broker for this information.

After pulling the top 10 holdings of each ETF identified earlier, we have found 41 dividend paying stocks to add to our list. Please keep in mind that the list of dividend paying stocks will change frequently based on the market and the direction of the ETF. Our analysis returned a few top dividend performers including – AT & T (T), Coca Cola (KO), United Technologies (UTX), and WalMart Stores (WMT) to name a few.

After reviewing the list of 41 dividend paying stocks, there are 6 that appear as a top holding in more than one ETF. Here is the list of the 6 dividend producing stocks that were found on more than one ETF -

1. Chevron Corp. (CVX) – Found on 2 ETF’s
2. Cincinnati Financial Copr. (CINF) – Found on 2 ETF’s
3. Integrys Energy Grp (TEG) – Found on 2 ETF’s
4. Leggett Platt Inc. (LEG) – Found on 2 ETF’s
5. CenturyTel Inc. (CTL) – Found on 3 ETF’s
6. PPG Ind (PPG) – Found on 3 ETF’s

Due Diligence

Now that we have identified our list of dividend paying stocks, is time to run out and buy all of them? The answer is – NO! Whether you get your list of possible investments from ETF’s, tips from other investors, the news, etc. – you must still complete your own due diligence on the stock. It is ultimately your decision to invest in a stock. Making lists of dividend stocks are great, just make sure you don’t rush out and purchase every stock blindly.

How do you build your list of dividend paying stocks?

To the average eye, searching for the top dividend paying stocks may seem like a great way to invest your money. Just think, invest a couple thousands dollars into a few stocks that yield double digit dividends and you can retire early! As nice as that sounds, investing in dividend paying stocks is a little more complex then that. It requires due diligence on the stocks that you plan to invest in, as well as careful planning and execution.

As much as we would all love to invest in a stock that returns a 15% dividend payment, there are way too many reasons not to. I have detailed a few of these reasons below.

Reasons NOT to Invest in the Top Dividend Paying Stocks

Here are a few (there are more) examples of why investing in the top yielding stocks can be very risky.

1. Misleading Yield – Many of the top dividend paying stocks can be a little misleading at first. As a share price decreases, the dividend yield increases. Provided there is a valid reason for a stocks price decline (which is normally the case), the high dividend yield is a lagging indicator. More than likely, the company will be forced to make a dividend cut to free up cash and take care of any troubles they may be having. The bottom line is to make sure you research any top dividend paying stock prior to making an investment.
2. Income Trusts – Many of the top dividend paying stocks that you can find today are known as income trusts. There are plenty of these double digit yielding stocks that are structured to payout the majority of their earnings in the form of a dividend. On the surface, this seems to be a great investment opportunity. However, most of the time it is just too good to be true. Many of these trusts are in the oil and natural gas exploration business or heavily invested in the real estate market. Income trusts are typically in highly speculative markets and have a strong chance of going under, so keep this in mind.
3. Liquidity – Several of the highest dividend paying stocks actually have a very low trading volume. This means the liquidity in the stock is not very good and you may run the risk of not being able to sell your position at a competitive price. The same goes for when you purchase a stock. Low volume is not just a problem for dividend paying stocks, but many high yielding securities tend to trade on low volume.

Run a Stock Screen

If you want to truly understand the risks involved when investing in the top dividend paying stocks, run a stock screen and see what comes back. Find a stock screen tool that will allow you to enter the dividend yield of a company. Search for the highest dividend yields for all publicly traded companies. When your results return, chances are you probably have never heard of most of the stocks. You will also probably find that the majority of the stocks on your list have very low volumes and not a lot of information about the company.

I recently ran this same stock screen through my online discount broker looking for stocks that had a dividend yield greater than 15%. My results returned 40 securities that paid this level of distribution. Here are the top 5 results -

• Robocom Systems Intl Inc. (RIMS.OB) – 128.57%
• Annuity & Life RE Hldgs (ANNRF.PK) – 111.11%
• Proshares Trust (TLL) – 100.02%
• ML Biotech Hldr (BBH) – 84.14%
• Nucryst Pharmaceut Com NPV (NCST) – 82.05%

I then headed over and checked out the fundamental details of each of these stocks. Three of the top five stocks on my screen were actually penny stocks with extremely light trading volume. The only stock that even looked like a potential investment was Proshares Trust, but it was a far stretch.

The point of this exercise is to prove that the top dividend paying stocks by dividend yields are some of the riskiest investments that you can make. Just because a companies dividend yield is high, doesn’t mean the company has strong fundamentals. Remember that stocks with high yields are that way for a reason. Investors don’t believe the company can maintain it’s current yield and expect the distributions will come back down!

Many investors don’t realize the power and advantages of purchasing ETF dividend paying stocks. When most people hear of an ETF, they immediately think of index funds or something to that nature. Very rarely does the average investor immediately consider ETF’s as a dividend investment option.

There are plenty of advantages to using an ETF as an investment option that returns a competitive yield. Let’s break down some of the basics of ETF’s and then talk about how we can leverage them to our advantage.

What is an ETF?

An ETF or exchange traded fund is a collection of stocks that make up the value of a security. An ETF trades just as a stock does and has a price that is constantly updated throughout the day, unlike a mutual fund. As the security is bought and sold, the price fluctuates just as it does for a stock. There are all different types of ETF’s available, including ones that pay a dividend.

Advantages of Purchasing ETF’s

An ETF provides the diversification of an index fund with the ability to trade it just like a stock. The security can be shorted, bought on margin, and there are also options that can be traded against them. Simply put, an ETF gives you the advantages of buying and selling a stock, coupled with the diversification that you would get in a mutual fund.

The fees for purchasing and owning an exchange traded fund are also very low when comparing them against a mutual fund for example. Keep in mind that an investor will still be required to pay a commission to their online discount broker, just as they would with a normal stock. All in all, trading ETF’s are a low cost alternative to a mutual fund.

ETF Dividend Paying Stocks

When it comes to high yielding securities, ETF dividend paying stocks make up some of the best investment options available today. There are actually several ETF’s that make up some of the highest dividend paying stocks. If you are looking for a diversified investment option that pays out a dividend, then an ETF may be the best option for you.

Finding the Top Dividend Paying Stocks

Not interested in investing in ETF dividend paying stocks? Even if you want to stick with purchasing individual stocks, an investor should not ignore an ETF entirely. Since ETF dividend securities are built to return a solid yield, an investor should look at what stocks make up the fund. Since these funds want to stay competitive and return a nice yield, the managers have done their due diligence on the stocks.

As as place to start, check out these ETF dividend paying stocks for some great investment opportunities – DVY, PEY, PFM, FVD, and DLN.

Did you know that some of the highest dividend paying stocks available to invest in are actually from Canadian companies? There are plenty of Canadian dividend paying stocks for investors to choose from. Just like their U.S. counterparts, there are both risky and safe Canadian stock investments. The hard part is trying to tell the difference between the good dividend paying stocks and the bad ones.

Here are a few of the associated risks you may come across from investing in Canadian stocks.

3 Risks of Investing in Canadian Dividend Paying Stocks

Here are a few risks that you need to be aware of before making your investment.

• Unknown Market – Unless you have bought and sold Canadian stocks in the past, then you are going into an unknown market with no experience. This may be okay for some savvy investors but should still be considered a risk before making any investment. It is also important to understand any currency differences between your home country and Canada. In some cases, this may be an advantage instead of a risk.
• Light Volume – Many of the highest paying dividend Canadian stocks have low liquidity. This means that the volume of shares traded each day is so small, you may not be able to sell or buy shares at a competitive price. There are plenty of exceptions to this rule, but this is something to keep in mind when searching out Canadian stocks.
• Canadian Royalty Trusts – These types of dividend paying stocks are often referred to as CanRoys. The majority of these securities have been known to have very high dividend yields which can be very misleading to the average investor. Most of these trusts are in the oil and natural gas exploration business and pay out the majority of their earnings in the form of dividends. During peak economic times, this can mean huge dividends but can also mean huge losses in a down economy. In addition, there is a planned 2011 tax status change that will force these trusts to become regular corporations which will limit their ability to payout hefty dividends.

Are There any Advantages?

So now that we have covered some of the risks and disadvantages, is there any reason to still consider investing in Canadian dividend paying stocks? The short answer is – ABSOLUTELY! There are plenty of high quality stocks from Canadian companies, just as there are in the U.S. and other countries around the world.

The next time you think about running a stock search of a security with a high dividend yield, why not consider adding one from Canada? As long as you complete your due diligence and are confident with your analysis, you should have no problem adding Canadian dividend producing stocks to your portfolio!

Did you know that there are well over 100 monthly dividend stocks that payout distributions 12 times per year? The majority of dividend paying stocks distribute a quarterly dividend every 3 months to its shareholders, making this monthly group a unique investment opportunity. These securities are some of the highest dividend paying stocks that you can find today based on dividend yields.

There are many different categories that monthly dividend stocks can fall into. The list below details 3 of the more popular categories and classifications.

Types of Monthly Dividend Stocks

Most of the monthly dividend stocks fall into one of the following categories.

• Canadian Royalty Trusts – Canadian royalty trusts are commonly referred to as CanRoys. Most of these companies are structured in a way where they can pay the majority of their earnings out as dividend payments. In addition, almost all of these trusts pay a monthly distribution as opposed to the traditional quarterly schedule. Based on recent changes in the Canadian tax laws, many of these Canroys will no longer be able to payout their current distributions, so be sure to complete your due diligence before investing.
• REIT – Real estate investment trusts (REIT) are some of the most dynamic dividend stocks that an investor can purchase. They are also some of the most risky stocks available today and should be carefully studied before making any investment decisions. The trust consists of a pool of money that is used to make real estate and mortgage loan investments. The income that is generated is then passed on to the shareholders in the form of a dividend.
• Income Trusts – An income trust is an entity that buys and holds assets in a trust account. These trusts are bought and sold just as any other stock would be traded in the market. The one advantage to owning a trust is that the majority of income generated is passed directly on to the trust account holders in the form of a dividend payment. Most of the trusts choose to pay a monthly dividend. A typical return from an income trust is much higher than a traditional stock because they are considered to be riskier. As a result, income trusts are some of the highest dividend paying stocks that are available.

Do your Homework!

Investing in monthly dividend stocks can be a valuable portion of your overall portfolio. Just remember to keep in mind that many of these types of stocks come with a much higher risk than a typical traded security. Be sure to always complete your homework on a stock before making an investment choice, regardless the type of security.

Provided you are properly diversified and feel comfortable with your homework, an income trust, CanRoy, or REIT can be a wise investment choice. Just remember that these types of investments should only make up a small portion of your overall portfolio!

Investing in the highest dividend paying stocks does not always mean you should pick those with the highest yield. In fact, go out and run any stock screen and look for all securities that have a dividend yield that is over 10%. I can guarantee that most of the company names you will find, you will have never heard of.

Instead of chasing high yielding securities, a smart dividend investor will look at other factors as well. Every investor wants a solid return on their investments. So why would you go chasing the highest yielding stocks who have questionable financial data? Most of the time, stocks with the highest yield have the most downside as professional investors consider them a risky investment. There are always exceptions, but following this general rule will help to keep risky investments out of your portfolio.

So what guidelines should an investor follow in order to invest in the highest dividend paying stocks of quality companies? Here are some helpful tips that you can start using as part of your investment strategy.

5 Tips for Investing in the Highest Dividend Paying Stocks

Here are 5 tips that every investor should follow when investing in the highest dividend paying stocks.

1. Growth – You want to be sure that a dividend paying stock is projected to grow at a decent rate in the next 3 to 5 years. Remember that growth and earnings fuel dividend distributions, so you want to make sure the company can sustain its current yield. There is no exact science to estimating the growth, but try to compare the company to its competitors for a realistic view of the outlook.
2. Strong HistoryThe best dividend paying stocks available are from companies who have a strong history of raising their dividends each year. While the past will NOT predict the future, it can be a good indicator of the companies past performance and where it is headed in the future. Check out the S&P 500 Dividend Aristocrats list of dividend paying stocks as a place to start. This list contains some of the highest dividend paying stocks who have increased their distribution for at least 25 consecutive years.
3. Dividend Yield – If you are running a stock screen for dividend paying stocks, then be sure to set a minimum and maximum level. Most professionals recommend a range somewhere between 2% (minimum) and 5% (maximum). You can play around with the numbers to fit your own needs, but these are some guidelines to start with. Why is setting a maximum dividend yield limit important? If a yield increases above current money market rates, then investors would start buying the stock which would increase the share price. An increased share price means the dividend yield would come back down to competitive levels. Stocks with yields over 5% are typically viewed as risky investments which is why we want to set this limit.
4. P/E Ratio – As with any other fundamental stock analysis, an investor should always take a look at the current and projected P/E ratio for a company. Try to compare the company’s P/E ratio to its competitors and to the rest of the market. While an acceptable ratio can vary between industries, a good rule of thumb is to look for a company with a P/E ratio of less than 20.
5. Dividend Cuts – Once you have started purchasing dividend paying stocks, be sure to keep up to date with them. If you want to protect your investments, then you need to follow any news that comes out on the company. Pay very close attention to any announcements of dividend cuts, as this is seen as a negative indicator on the stock. If a company needs to cut its distribution, then it needs to raise cash and has some problems financially. As an investor of the highest dividend paying stocks, it is recommended to immediately sell securities that announce a dividend cut.

Invest in the Boring Stocks

Most of the time, investing in the highest dividend paying stocks is very boring. Many investors like the excitement of going after the high growth and risky stocks. These are some of the stocks that come with those double digit dividend yields you searched for earlier. There is no doubt that this is where the excitement can be found. It is also where a lot of disappointment will be found over time.

If you want to become a sound investor of solid dividend paying companies, then it is recommended to pick the
so called “boring” stocks. This can be done by following the 5 tips identified earlier, as well as others you may pick up overtime. It is your money and future, so why risk it just to be entertained?

One of the best places to find a quality list of dividend paying stocks is by referencing the S&P 500 Dividend Aristocrats. This published list has some of the absolute best dividend paying stocks that an investor can find today. It can be referred to as the “Holy Grail” for most experienced dividend investors and should be leveraged by any new investor.

S&P Dividend Aristocrats Criteria

In order to be included in the list of S&P 500 Dividend Aristocrats, a company must meet a list of strict requirements. Here are just a few of the high level requirements that a company must meet to be included in the list of dividend paying stocks -

• Must be a member of the S&P 500.
• Must have increased dividends every year for at least 25 consecutive years.

For additional information on the specific criteria used, check out the identified list of resources listed below.

The list of dividend paying stocks that are included in the dividend aristocrats is reviewed after each quarter. A company will be removed from the list if the following criteria is NOT met during this review –

• Quarterly Review – Any company who is removed from the S&P 500 will be dropped from the list of dividend aristocrats at the end of each quarter.
• Annual Review – Each December during the annual review, a company that did not increase their calendar year dividends compared to the prior year will be dropped from the list. This includes companies who make a dividend cut or who make no changes in their dividend distributions.

Use S&P Dividend Aristocrats Cautiously

While using this list of dividend paying stocks is an essential step in building a solid and diversified portfolio, it should be done with caution. Since the list will only drop stocks who have made a dividend cut each December, the current list may include companies that won’t exist on the list at the end of the year.

In recent memory, many banking stocks would have fallen into this category. Several banking stocks (prior to the recent financial recession) were some of the top dividend paying stocks around. During the economic downturn, many of these companies were forced to slash their dividends in an attempt to hold onto any cash they may have had. Reviewing this list in the middle of the year may have led to an inaccurate assumption.

It is very important to remember that an investor always completes their due diligence on a stock before making a purchase. Using investment tools like the S&P dividend aristocrats list can really help guide your investment decisions. Just remember that using this list (or any others) should only make up part of your analysis!

S&P Dividend Aristocrats Resources

• S&P Dividend Aristocrats Overview
• S&P List of Dividend Aristocrats Stocks