7 quick steps to pick the best dividend stocks

7 quick steps to pick the best dividend stocks

As investors, we all love dividends. Other than the thrill of seeing a stock you own rise higher and higher in the stock market, receiving passive dividend income from your investments every year is something we all look forward to.

So if you’re more of an income investor and looking to invest for dividends, your stock portfolio will be markedly different from someone who’s investing for high growth and capital gain. The stocks that will give good, consistent dividends may not necessarily be the kind that will grow by 20-50% a year and vice versa.

So if you investing for dividends, you have to invest accordingly and only pick the best stocks that will give the passive dividend income you want. The question is: How?

So if you’re slightly lost and looking for some direction, here are 7 quick steps to help you pick the best dividend stocks around: (Hint: You can’t just look at dividend yield alone!)

1. Look for mid to large cap stocks


The best dividend stocks are usually large, mature companies with stable revenue, profits and cash flow. These companies have little growth left in them. Because these companies are no longer expanding aggressively, the majority of their earnings can be returned to shareholders as dividends.

On the other hand, a smaller, high-growth company needs more cash and resources to grow and expand its business, leaving less money to pay shareholders dividends (if any).

2. Dividend payout ratio is 50% or more


If a company is large, stable and isn’t seeking to grow aggressively any more, then the majority of the profits it makes should be returned to shareholders. So look for a company with a dividend payout ratio of at least 50% or more. For example, Nestlé (Malaysia) returns over 90% of its earnings to shareholders as dividends.

If a company has a low payout ratio, ask yourself why the company is holding on to the cash. Unless they have a good reason to do so or have a way to generate exceptional returns for shareholders, the majority of profits should be paid out as dividends.

3. Track record of consistent dividends


The company should have a long and stable track record of paying consistent/growing dividends to shareholders. No point if a company is large and successful and has profits to distribute as dividends, but chooses to pay them out inconsistently.

Check to see a company pay a consistently growing dividend over the last 5-10 years. This shows that as the company grows more and more successful, the management is also willing to share the fruits of its labour with its shareholders.

**Want a List of Stocks That Pay Good Dividends Even During a Crisis?**

Here are 10 Dividend-Paying Stocks Every Investor Should Have On Their WatchList

Click To Download Dividend List

4. Company’s fundamentals are sustainable


Many dividend investors tend to ignore the overall aspects of a company’s fundamentals. They choose to focus primarily on the amount of dividends they can receive. This is wrong. While dividend yield is obviously important for someone seeking dividends, it is also important to consider the overall health of the company.

A company with deteriorating fundamentals (e.g. falling revenue, profits, cash flow, fading economic moat, etc.) cannot sustain its dividend payout in the long term. The less revenue and profit it makes, the less dividends it can pay.

Over time, a company with falling revenues and profits will see its stock price fall when investors realize that the company is no longer performing. This fall in value will eat into any dividend gains you might have had at the start – leaving you back at square one.

So always make sure the dividend company you want to invest in will remain fundamentally strong and robust for many years to come.

5. Company has low CAPEX


As a dividend investor, you prefer to invest in a company with low capital expenditure (CAPEX). A company with high CAPEX means that it has to continually reinvest its profits in maintaining its business operations, leaving less to distribute as dividends.

For example, airlines have very high CAPEX as they need to continually maintain their aircraft and upgrade them to newer models after a certain amount of years.

So look for a company that’s able to maintain/grow its business with minimal CAPEX.

If you want help, you can always kick start the idea by downloading our watchlist of dividend paying stocks below:

6. Company has stable free cash flow


Ultimately, a company must have real cash (not just profits) to be able to pay dividends to its shareholders. Even if a company is profitable but has negative or inconsistent free cash flow, it will have trouble paying stable dividends.

A smaller company that is seeking to grow might have negative free cash flow as it expands its business. But a large, stable company that dominates its industry should be producing high amounts of free cash flow year after year.

7. Yield must beat risk-free rate


The dividend yield you receive should beat the risk-free rate of the country you reside in. The risk-free rate is the lowest return you can theoretically get “risk-free”over a period of time.

In the US, if you plan to invest your money for ten years, then the risk-free rate is usually based on the return of the 10-year US Treasury note which is currently around 2.30%. In Singapore, the risk-free rate is usually based on the interest your CPF special account gives you, which is 4%.

If your dividend yield can’t beat your risk-free rate, you might as well put your money with your CPF since you face less risk growing your money there compared to investing in stocks.

The fifth perspective

There you have it! Seven quick steps to help you pick the best dividend stocks to invest in. As you can see, there are lots more items to consider other than just dividend yield!

So remember to check these seven criteria whenever you’re looking to invest for dividends.

**Want a List of Stocks That Pay Good Dividends Even During a Crisis?**

Here are 10 Dividend Paying Stocks Every Investor Should Have On Their WatchList

Click To Download Dividend List

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Victor Chng is an equity investor and co-founder of The Fifth Person. Victor has also appeared on national radio on Money FM 89.3 for his views and opinions on how to invest successfully in the stock market, and his investment articles have been published on The Business Times and Business Insider. Victor represented Singapore in the 2008 TAFISA World Games in Busan, South Korea and was the 2008 IFMA World Muay Thai Championships bronze medalist, kicking some serious ass along the way.


  1. jaron

    November 27, 2014 at 8:37 pm

    nice share victor. especially the last point which i had no knowledge of it. maybe the next post could be types of investor

    • Victor Chng

      December 1, 2014 at 2:41 pm

      Thanks Jaron! Glad you found the article useful 🙂

  2. David Lim

    November 28, 2014 at 5:36 pm

    Hi Victor,
    Thank you for your summary on identify genuine dividend counters.

    I clicked on the link on ‘5 Safe High-Yield Stocks in Singapore’ & entered my email to subscribe for the report. However, after a few days, I still have not received any email on how to download the report.

    Wonder what is the link on your website to download ‘5 Safe High-Yield Stocks in Singapore’?

    Thank you

    • The Fifth Person

      December 1, 2014 at 3:33 pm

      Hi David,

      Thanks for your interest! We sent you another email with the link to download the report. Sometimes, emails may end up in your junk folder, so you might have to check that too 🙂

  3. anon

    November 29, 2014 at 10:56 pm

    “In Singapore, the risk-free rate is usually based on the interest your CPF special account gives you which is 4%.”

    Shouldn’t the RFR be SG Govt 10yr bond rate (aka MASB10Y), which is currently 2.26% [http://www.tradingeconomics.com/bonds]?
    CPF contributions are highly regulated, with mandatory contributions & voluntary top-ups subject to quantitative ceiling threshold. The subject of CPF contributions has quite a maze of rules in itself. Best thing is to plough through CPF website.
    Buying SG Govt bond, on the other hand, is not hampered by quantitative threshold, and offers ease of participation.
    I believe SG RFR would be overstated if CPF SA interest rate of 4% is used. At least this is what I think.

    • Victor Chng

      December 1, 2014 at 3:06 pm

      Hi Anon,

      You’re absolutely right. Using your CPF to generate returns isn’t as straightforward as buying a bond and there are many regulations to contend with.

      I used the 4% interest rate of the CPF special account because it’s a more conservative figure and it is technically risk-free after all. But you can also most certainly use the 10-year bond interest rate as your risk-free as well 🙂

  4. David Lim

    December 2, 2014 at 4:22 pm

    Dear Sir/Mdm,
    Thank you very much.

    I got your email.

    Best Rgds

    • The Fifth Person

      December 2, 2014 at 6:50 pm

      You’re most welcome, David! 🙂

  5. Chrissie

    January 6, 2015 at 10:32 am

    Hi Victor, is investing for dividend easier? I bought your book recently but the numbers are making me confused.

    • Victor Chng

      January 7, 2015 at 2:51 pm

      Hi Chrissie,

      Investing for dividends is generally simpler as the stocks you pick are usually mature, stable companies with a good track record of paying dividends.

      I will like to congratulate you for taking the first step in empowering yourself with financial & investment knowledge.

      Learning anything new is the same as learning how to add 1+1 as a child. It may appear difficult and new initially, but as time goes by, it gets easier.

      Hence, it is the same when you look at the numbers in an annual report; if you keep on practicing, it will get easier and more familiar as time passes.

      On a side note, thank you for being such a regular reader of The Fifth Person! Continuous support like yours motivates us to do our best in what we do. So keep those questions coming! We’re more than happy to help 🙂

  6. Ben

    May 5, 2015 at 8:52 pm

    Pls email me for all reports as I am keen to read your articles.

  7. Henry

    May 9, 2015 at 2:06 pm

    Thank you for the insights.

    • Victor Chng

      May 10, 2015 at 12:41 pm

      You’re most welcome, Henry!

  8. Dilip

    September 6, 2016 at 9:15 am

    Hi Victor, tks for the informative write-ups..
    Rgds Dilip

  9. Alfred Lee

    February 9, 2017 at 9:29 am

    Great read!

  10. ban haw leong

    August 2, 2018 at 9:09 am

    your guidance is very useful to retirees like myself. I would certainly like to subscribe to your regular newsletter etc. please include me in your list of subscribers

    • The Fifth Person

      August 2, 2018 at 11:11 am

      Sure, we’ve added you to our newsletter where you’ll receive our latest articles and more!

  11. zaman khan

    August 22, 2018 at 1:03 pm

    may i know what is devident ?

    • The Fifth Person

      August 22, 2018 at 6:06 pm

      Hi Zaman,

      A dividend is part of the profit a business earns that it pays to shareholders.

      For example, if a company makes $1 million in profit this year, it can decide to distribute half of its profits ($500,000). If there are 1 million outstanding shares, then each share you own will receive 50 cents in dividends.

  12. Evan Khor

    August 5, 2019 at 8:34 pm

    Hi. May I know the list of dividend that all Malaysian investors should have?

    • The Fifth Person

      August 6, 2019 at 12:30 pm

      Hi Evan,

      Please email us and we’ll send the download to you 🙂

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