5 Easy Steps to Pick the Best Dividend-Growth Stocks

Looking to build passive income through dividend investing? Dividend-growth stocks are an excellent way to achieve consistent income while enjoying potential long-term capital appreciation. But not all dividend-paying companies are created equal. To find the best dividend-growth stocks for your portfolio, follow these five proven steps.

1. Invest in Companies with Stable and Resilient Businesses

For reliable dividends, focus on companies operating in industries that withstand economic downturns. Businesses offering essential goods or services, like grocery stores or utilities, tend to be less affected by market volatility.

Take Sheng Siong Group as an example. This Singapore-based supermarket chain thrived during the COVID-19 pandemic, thanks to its affordability and accessibility. Even in challenging economic times, consumers continue to purchase essential goods, ensuring the company's revenue remains stable.

Pro Tip: Look for companies with a strong brand presence and a consistent demand for their products.

2. Seek Predictable and Growing Revenue and Profit

A company with growing revenue and profits is more likely to sustain and increase its dividend payouts. Since 2011, Sheng Siong has demonstrated steady growth in both revenue and net profit, making it a reliable dividend payer.

In contrast, avoid companies in cyclical industries like oil and gas, where profits fluctuate based on market conditions. Erratic earnings can lead to unpredictable or reduced dividend payouts.

3. Focus on Companies with Healthy Free Cash Flow

Dividends are paid from cash, so free cash flow (FCF) is critical. FCF is the cash left after covering operating expenses and capital expenditures. Healthy FCF ensures the company can continue paying dividends without jeopardizing its financial stability.

For instance, Sheng Siong consistently generates positive FCF, allowing it to pay stable dividends even during periods of high investment, such as in 2016 when it invested heavily in new properties.

Pro Tip: Avoid businesses with high capital expenditure needs, such as airlines, which often struggle to maintain positive cash flow during downturns.

4. Prioritize a Strong Track Record of Dividend Payments

A company’s dividend history is a key indicator of its reliability. Look for stocks with a consistent or growing dividend payout over the years. Sheng Siong, for example, has increased its dividend per share from 1.77 cents in 2011 to 6.5 cents in 2020.

Also, check the dividend payout ratio, which measures how much of a company’s earnings are paid out as dividends. A sustainable payout ratio, usually under 80%, signals the company can balance shareholder rewards with business growth.

5. Ensure the Dividend Yield Beats the Risk-Free Rate

The dividend yield of your chosen stock should exceed the risk-free rate offered by secure investments like government bonds or CPF accounts. Otherwise, you’re better off choosing the safer option.

For instance, Sheng Siong’s dividend yield of 4.1% in 2020 exceeded the 4% CPF Special Account rate, making it an attractive choice for Singaporean investors seeking higher returns.

Pro Tip: When investing in foreign dividend stocks, consider tax implications, such as withholding taxes, which may lower your actual returns.

Why Dividend-Growth Stocks Matter

Dividend-growth stocks combine stability and growth, offering investors the dual benefit of regular income and long-term value appreciation. By using these five steps, you can identify high-quality dividend stocks and build a portfolio that aligns with your passive income goals.