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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?