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Selecting stocks that pay high dividends can come from good and bad companies, depending on the criteria used. Successful income growth investors carefully screen their stock picks, avoiding any market hype or distractions. These savvy investors avoid chasing the highest yielding stocks that are risky and instead focus on the long term stability of the company.

Inexperienced investors looking to generate income, on the other hand, tend to get caught chasing the highest yielding stocks which is a risky strategy. The truth is that stocks that pay high dividends over many years never have the highest yield. In fact, most blue chip stocks that pay high dividends offer a yield that is below 5%.

What most novice investors don’t realize, however is that a company that consistently raises its payout will provide a much higher return over time than those without an increase. A stock that has a yield off 3% that has a history of giving its share holders a 10% increase every year can really make a difference.

There are several pieces of criteria that investors can used to try and identify low risk stocks that pay high dividends. Here are four examples of what many experienced income investors use to screen their stocks.

• Current Dividend Yield – A good rule of thumb is to search for stocks with a dividend yield between 2.5% – 6%, give or take a half of percent. Historically, the best dividend paying stocks fall into this range during normal economic conditions. The rates can be adjusted accordingly depending on the level of acceptable risk for an investor.
• Dividend Payout Ratio – Look for stocks that pay high dividends with a payout ratio less than 60% or 70%. Any company that has a higher payout will struggle to maintain their current distribution. The dividend payout ratio measures the amount of earnings used to make dividend payments to shareholders.
• P/E Ratio – Any dividend stock that has a price per earnings ratio (P/E) above 20 is probably overpriced. Investors looking for the lowest risk stocks should avoid stocks with high P/E numbers. As the market corrects, the same stocks may become attractive once again and make the perfect dividend investment.
• Dividend History – Traditionally stocks that pay high dividends have a strong history of increasing their payout. Any company that has consistently raised their annual dividend for at least 10 to 15 consecutive years shows stability. Companies with a history of 25 or more years of raising their payout offers incredible security in the market.

The criteria listed above are only a few examples of what can be used to screen out low risk stocks that pay high dividends. Investors should investigate criteria that fits their investment needs.

Investing in High Yielding Stocks

Investing in high yielding stocks is one of the lowest risk investment strategies used today. By filtering out the highest yielding dividend stocks using the criteria above, an investor can drastically lower their risk in the market. The remaining low risk, blue chip companies can make up a solid portfolio of stocks that pay high dividends.

What criteria do you use to filter out the best dividend paying stocks?

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