Best Stocks By Dividend Yield

Screen over 46,000 companies to find the best stocks by dividend yield meeting your criteria, see Morningstar analysts' best dividend stock picks, stock research reports & 2-year dividend forecasts for ASX200 stocks, inside Morningstar Investor. Sign up for a FREE 4-week trial^ now to get access. No credit card needed.

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Dividend Stocks

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Stock Name	Market Cap (mil)	Latest price	Dividend Yield	Price/Earnings	Morningstar Rating
1. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
2. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
3. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
4. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
5. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
6. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
7. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
8. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
9. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX
10. XXXXXXXXXX	XXX.XX	XXX.XX	XX.XX	XX.XX	XXXX

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How to choose dividend stocks

Dividend payers such as the big four banks, BHP Group, and tollroad operator Transurban are prized by Australian investors searching for income in retirement. The taxation system also richly rewards shareholders who can take advantage of franking credits.

Dividends are an indication that a business is established and financially healthy enough to return cash to shareholders. They also force management to focus on the long term and their capital-allocation decisions.

Sadly, however, so-called high yield stocks are not necessarily the best buys. Choosing stocks with the highest dividend yield can lure investors into risky corners of the market, exposing them to financial distress, dividend cuts, and share price declines.

We'll look at six factors that can contribute to a sustainable dividend.

1. Seek 'healthy' payout ratios

One of the most important statistics for dividends is a company's payout ratio.

As the name suggests, the payout ratio is the proportion of a company's earnings paid out as dividends. For example, if a company pays out $2 a share and has $5 of earnings, 2 divided by 5 is 0.4 – or 40 per cent. The payout ratio is 40 per cent.

A lower payout ratio can indicate that the dividend is "healthy".

There is a margin of safety that allows a company to miss its earnings target and still be able to pay out its dividend, and there may also be room for management to increase the dividend over time.

A payout ratio over 100 may indicate that the dividend is in jeopardy because no company can continue to pay out more than it earns indefinitely.

The payout ratio is a key number in evaluating dividend safety. But it's not the only statistics to consider.

For example, what's a good payout ratio for a utility – say 70 per cent – might be much too high for a steel mill or an oil refiner, which are much more volatile businesses where earnings could be wiped out at the bottom of a cycle and the dividends get cut.

Investors should think about how a payout ratio balances against the company's need to invest for internal growth, as well as providing that cyclical safety margin for future downturns.

2. Make sure your dividends grow

Ultra-high dividend yields can be particularly attractive in the current low-return environment, but it’s important to resist the temptation to load up on these shares. Investors may be better placed seeking companies who not only pay out dividends but also have a track record of continued dividend growth.

If a company just raised its dividend, it's quite unlikely – unless it has a deliberately and obviously variable policy for paying dividends on a quarterly basis –it's going to turn around and cut it immediately.

Companies that are focused on growing dividends tend to be higher-quality, cash-rich businesses that hold up well in down markets, participate in up markets, and are capable of excess returns over a full market cycle.

But like the payout ratio, growing dividends is not a perfect indicator.

Dividend cuts in the past don't mean that dividend cuts are going to be there in the future, and the absence of a cut doesn't guarantee that the dividend won't be cut in the future.

But if there is a pattern of dividend cuts, it can raise important questions about the business. It may be too volatile to sustain what you expect.

3. Does it have a moat?

Why do moats matter when it comes to dividend stocks? Companies which have a sustainable competitive advantage tend to be better able to generate free cash flow and raise their dividend payouts over time and through periods of volatility.

Coca-Cola is an example of a wide-moat company. It has good profit margins, the opportunity to expand them further and generates significant amounts of free cash flow.

4. Don't ignore the balance sheet

Investors should consider both equity metrics - such as price-to-earnings and earnings-per-share – and balance sheet metrics such as gearing (or borrowed money), interest coverage and net debt / EBITDA.

As creditors stand ahead of investors in line for company cashflows, a healthy balance sheet – or a balance sheet with more total assets than liabilities – is a positive when it comes to selecting a dividend stock.

A company with a strong balance sheet can also go to the market and borrow cheap debt to pay for acquisitions, projects that they're doing internally, instead of issuing new equity or reducing dividends.

A good rule of thumb is to be extra sceptical of companies with interest coverage ratios (EBIT/interest expense) below three times or net debt/EBITDA ratios above two times.

5. Pay attention to valuation

Buying a share for their dividends and yield alone may save you from making emotional trading decisions based on share price volatility, but constantly overpaying for shares is no formula for success. A company with a fat dividend yield is only attractive at the right price.

A good way to get a sense of a stock’s valuation and whether or not it can sustain it is to look for stocks that are trading at or below Morningstar’s fair value estimates, which considers all of our research and forecasting of a company's future financial performance.

Investors may also like to buy stocks with a "margin of safety”—that is, companies trading at a meaningful discount (at least 10-15 per cent) to their fair value estimate.

6. Look at free cash flow and beware of ‘pseudo dividends’

Excess free cash flow is a crucial sign of a company’s ability to maintain sustainable dividends. That way, if a company goes through a tough year, they may still have enough of a buffer to maintain their payout.

But don’t forget to consider how that free cash flow is generated. Is it relying on debt to pay unsustainable, ‘pseudo’ dividends?

If you look for companies with at least 1.5 times free cash flow cover, about two thirds of earnings and free cash flow will be used to pay the dividend – leaving you with a margin of safety for a potential short-term drop in cash flow.

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