How to find dividend growth stocks for passive income

Learn what value is for dividend growth stocks

The key to the castle is learning to understand what value is and then how to find it. To do this, there are two distinct parts understanding supply and understanding demand.

Supply comes from the creators of products and services. Demand comes from the consumers of those products and services.

The supply can be understood through 10k reports and annual reports. There is no short cut here; one needs to dive into the numbers of the balance sheet, the income statement and the cash flow statement. Reading several reports from one company gives you a clearer picture of where they have been and potentially where they are going. Reading several reports from different companies in the same sector will give you an overview of the market.

The demand can also be researched by looking at the consumer market trends and regulators.

Some Recommended Reading to set you off on you learning journey in dividend growth stock investing

Shopping for dividend growth stocks

Shopping for value is about making sure you get a good deal. There are three schools of thought.

  • Buy when “blood is in the streets.”
  • Lump Sum investing
  • Dollar cost average

“Blood in the streets” means to buy a stock when the market has underpriced its value. Markets tend to overreact to any negative news. Value buyers jump at these opportunities, as they offer to get more bang for your buck. The philosophy is to buy value when others are selling value for under the market price. i.e. buy when others are fearful.

Dollar cost averaging, is the way of the turtle, buying your target dividend growth stocks a little bit at a time, come rain or shine. Every month a set amount is acquired. This strategy allows you to accumulate the average price over a long period. It reduces the risk of buying at the top.

Lump sum investing, is simply using all your cash to buy at the current market price.

There are no rules on how to deploy your capital and each personal situation is different. Many investors use a mix of all the three strategies to suit their needs.

Hot trends are dangerous

Trends Come and Go, But Style Is Forever. Trends tend to be fuelled by hype; the hype is generated by competing marketing campaigns. During this phase of market maturation, there might not be any clear winner and investing in any one company is hyper risky.

Toothpaste and toilet paper stocks are more dependable for your passive income! AI and Space Nanotech might be sexy but not a reliable passive income asset to pay for your toothpaste and toilet paper.

The iPhone was a risky bet when it was launched, it is less so now, and probably that is why Warren Buffet has bought Apple shares. Once a trend is well established the market players will also be established. The rule of thumb is if they have become a household name they are worth investigating. The risk-reward ratio is much better once a market is mature than when it is in its growth phase.

While new markets are growing, the competition will be hard. Not all market participants will make it. It is much safer to invest when the waters have calmed down, and the situation is clearer.

See Also: How to build a Dividend ETF Portfolio

The choice is between your best options a no-decision could also be a good decision.

All decisions in life are about choosing the best option from those available.

Dividend stock investing is the same. The first step is to find dividend stocks.

First filter

  • The PEG ratio (price/earnings to growth ratio) of around 1
  • Market Capitalization of more than 8.5 billion
  • P/E ratio below 21x
  • Earnings per share higher than 4.5%
  • Annual dividend yield above 0.5%

Additional Filters

  • 5 Year Average Dividend Yield
  • Dividend pay-out ratio
  • Book Value

The most important ratios for passive income investors:

The annual dividend yield indicates how much passive income will a stock produce.  The annual yield depends on the entry price. A share which is bought at $10, but is now priced at $100 gives an annual dividend yield of $2. However on a cost basis of $10 it gives a 20% annual yield.

The dividend growth rate is important because it measures by how much the dividend has risen compared to last year. This could indicate a trend. Will dividend increase or decrease in the coming years?

The dividend payout ratio measures how much funds are retained by the company for further reinvestment and how much is distributed to the shareholders. For this dividend increase to be sustainable, it is important for the company to keep reinvesting in its business. This also indicates the Management team’s relation with shareholders. Is the management team focused on dividends or on just growing the company?

Reviewing the passive income short list.

The filters above are numeric in nature, the next phase on your research will focus on the history and actions of the management team rather than the numbers.

The Management team:

  • What is the history of the CEO?
  • How have previous companies performed under his tenure in terms of earnings and revenue growth rate?
  • How many shares does the management own and what have been the recent movements?

Business Model

  • What is their business model, is it easy to understand?
  • Is the business model dependent on any one factor? (Example Government contracts?)
  • Do they require continuous capital investment?
  • How easy is it for them to defend their market share?
  • What is their history of Revenue and earnings growth in the last 2 to 5 years?

These filters are for educational purposes only, but they give you a good basis to start understanding the pool of dividend growth stocks. There are many places on the internet where you can get feedback on your opinion. Use them to learn.

See also: Advantages and Disadvantages of dividend growth stocks

Looking for high dividend stocks gives you a lot of high-quality companies

Researching stocks which have both a consistent dividend distribution and growth dividend distribution will automatically eliminate a lot of companies with questionable prospects. In the process, investors will also overlook a few potential stocks which might increase their stock price. However, the chances of finding those winners are small, compared to the security of companies which can issue regular dividends.

The first rule in investing is not to lose your capital.

Companies which distribute dividends are willing to share their profits with the owners of a company. Good managers know the limits to expansion and the best rate at which a company can grow. The payout ratio which shows the percentage of profits retained vs the percentage distributed as dividends shows the philosophy of the management in terms of balancing expansion vs rewarding the investors in their stock.

Tools to help you get you started.


Not investment advice. Not financial advice. Consult your financial advisor. Not a recommendation to buy, sell or hold. The staff of this site may own these digital asset/s mentioned on this page. Investing is risky and you may lose all your capital. See full disclaimer.

Keep in mind that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. We try our best to keep things fair and balanced, in order to help you make the best choice for you.

Author: Jim Reynolds
Jim Reynolds. Is passionate about finance, passive income and cryptocurrencies. He writes about his passions on He has worked in the tech and financial industry for a few decades. He holds a masters in business admin and a bachelors in IT. All his writings are not investment advice.

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