Researching dividend stocks is an art and a science. It takes a lot of patience to find great dividend stocks and then thoroughly read through all the important information.
Most beginning investors don’t know how to start this process. After all, it can seem like a complicated new world.
However, the rewards are definitely worth it: passive dividend income retirement!
I’ve been getting a lot of requests to talk about my dividend research process. Now, keep in mind that everyone has a different process. There’s more than one way to skin a cat!
However, I hope this guide will be useful to those who are researching dividend stocks for retirement.
1. Screening/idea generation
The first part of the dividend research process is idea generation. There are a ton of ways this can go about. Sometimes I hear a really interesting idea over the internet or from a friend or from an investor I respect.
Historically, this had led to some really great ideas.
Other times, I’m actively screening for dividend stocks with stock screeners. I typically get 60% – 70% of my ideas through this process.
Here are the top three stock screeners that I currently use (and they’re all free):
1. Google Finance: This is one of the best free stock screeners. You can search by a variety of criteria to narrow down your universe to the best dividend stocks.
2. Dividend.com: The really cool feature about dividend.com is you can screen by stocks that have increased dividends every year for 10 years or 25 years.
3. Finviz.com: Don’t be scared of the interface. It looks A LOT more complicated than it really is. Check out my tutorial below:
Keep in mind that stock screening is just a tool to narrow down your universe of ideas. Don’t just buy the stocks that some random stock screener spits out.
During the idea generation process, I like to use Morningstar to get some great quick and fast information about stocks.
Morningstar pulls income statement, balance sheet, profitability ratios, debt/leverage ratios, valuation ratios, efficiency ratios, and so much more.
This saves a lot of time when you just want to get quick and fast information about a particular stock.
Here are some general characteristics you want in a dividend stock:
- Highly profitable and long dividend history
- Fair valuation
- Growing revenue and profits
- Dominant player in a industry
- Low amount of leverage
2. Read the financial statements
Once I have a list of stocks that match my initial screening criteria, I start reading the financials.
I get all of my information about the financials from the Securities & Exchange Commission (SEC)’s EDGAR website.
The SEC EDGAR website is basically the site where all public companies file their financial information with regulators. It has a wealth of information!
Check out my tutorial on how to navigate through this surprisingly well designed government website:
Reading the financial statements is an incredibly important part of the dividend research process. 70%+ of investors will never actually read the financials of the stocks they invest in!
That’s like buying a house without ever seeing it in person!
Here are the financial statements that I like to read:
1. 10-K (annual report): I like to read at least two years of annual reports.
2. 10-Q (quarterly report): I like to read the two latest quarterly reports.
3. 8-K (current report): I like to read the last six months of current reports to get the most recent news about the stock. Don’t worry, these reports are generally pretty short (less than 3 – 4 paragraphs).
4. Proxy statement: I like to read the most recent proxy statement to see how much the executives are making and how much stock they own.
3. Read conference calls
Most companies have conference calls to discuss quarterly results.
Conference calls are a great way to get more information about results that might not be disclosed in the filings. I typically like to both listen and read the conference calls.
Conference calls will be archived on a company’s investor relations site for a few weeks. You can pull up the transcript on Seeking Alpha for free.
I would highly recommend taking notes from the conference calls (either by paper or through a word document).
4. Model out financials
One of the last important steps of the research process is to model out the company’s financials. I only do this for stocks that I have a great deal of interest in.
I’ll calculate a bunch of ratios for this stock…such as:
- Profitability (gross margin, operating margin, net margin)
- Sales and profit growth
- Return on equity
- …and a more (depending on which industry the stock is in)
Modeling out the financials is incredibly important and is a step that most people don’t actually take.
5. Get other opinions
One of the last parts of the research process is getting opinions about the stock from a variety of sources. This is when Seeking Alpha comes in handy.
It’s basically an open source stock research community. People can post articles about why they are buying (or selling) a particular stock. There are often great debates in the comments section.
This is a really great way to see if you missed something. What if someone is really negative on the name? Did you miss something?
Another thing I like to do is talk with other investors. I have a few friends in real life who also invest in dividend stocks. Sometimes we actually just go out to dinner and talk shop. It’s a fun way to research dividend stocks!
How long should you research a stock?
So, this five step process might seem long…but it is 100% necessary.
Many people ask how long you should research a stock before buying it. Well, that depends. Some people research very fast and some people research very slow.
It also depends on your level of experience.
A general rule of thumb is research until you’re comfortable that you have a good idea of the business, its future prospects, and how the financials have performed.
In general, I would say spend at least 5 – 10 hours on every name in the portfolio. While that may seem like a lot, you are entrusting these dividend stocks with your retirement.
Think about how people buy rental homes to invest in.
They go through a bunch of hoops like:
- Going through MLS listings
- Talking with realtors and the home owners
- Negotiating with the home owner and the bank
- Making necessary repairs
- Screening tenants
- …and so much work!
The great thing is that you only have to research a stock once. Keeping up with the news flow and quarterly results will only take a fraction of your time.
Like many passive income streams, most (80%+) of the work is done up front and you get paid continually!
Want to learn more?
If you want to learn more about my process for dividend investing, I would highly recommend that you check out my online course.
The Ultimate Dividend Bootcamp Course will teach you how to build a passive income dividend portfolio for retirement from scratch.
Everything is explained easy with tons of case studies.
You will learn about:
- My exclusive 9 factor dividend stock picking checklist
- How to monitor and rebalance your portfolio
- How to avoid big investment losses
- Dividend stock screening tutorials
- Avoiding common (and costly) dividend investing mistakes
Click here to get this course and start your early retirement journey today!
If you want to learn more about reading financials and SEC filings, check out my Financial Statement Analysis Course.
These are skills that 95%+ of dividend investors never learn so you can get a real investing edge with these simple and easy to learn skills.
You will learn:
- How to read financial statements (balance sheet, income statement, & statement of cash flows)
- Over 15 different types of financial ratios
- Different valuation metrics to value stocks
- How to read SEC filings like a pro
- How to read 10-Ks and 10-Qs (annual and quarterly reports)
Click here to get this amazing course and get your investing edge!