As I keep learning about stock investing, I’ve definitely made my fair share of mistakes. If you have a look at my portfolio (please wait a few seconds as it’s slow to load), you will probably notice some terrible stock choices. I basically fell into all the traps in which an amateur stock picker would have fallen: keeping a low quality stock and hoping it will recover, value traps, dividend yield traps…
However, I realized dividend-focused stocks might offer a helpful mix of income and growth. So I did some research and decided to center my strategy on dividend stocks that meet a 30-point checklist. I call it the Dividend Prince Rating: each criterion earns a stock one point, and it can earn a maximum of 30. Here’s the breakdown.
TL;DR Table of the 30 Criteria
| Criterion | Requirement | Points |
|---|---|---|
| 1. Blue-Chip Stocks | Well-established, stable, recognized companies | 1 |
| 2. Brand Ranking | Within the top 500 globally | 1 |
| 3. 10-Year Revenue Growth | Above 10% annualized | 1 |
| 4. 10-Year Net Income Growth | Above 10% annualized | 1 |
| 5. 10-Year EPS Growth | Above 10% annualized | 1 |
| 6. P/E Ratio | At or below the sector’s range | 1 |
| 7. Net Profit Margin | Above 15% | 1 |
| 8. Dividend Payout Ratio | Below 70% | 1 |
| 9. Dividend Yield | Above 2% | 1 |
| 10. Return on Equity | Above 10% | 1 |
| 11. Return on Tangible Assets | Above 10% | 1 |
| 12. Return on Invested Capital | Above 10% | 1 |
| 13. Debt-to-Equity Ratio | Below 2 | 1 |
| 14. Debt-to-Assets Ratio | Below 0.33 | 1 |
| 15. Price-to-Book Ratio | Below 3 | 1 |
| 16. Morningstar Fair Value | Stock considered undervalued | 1 |
| 17. Morningstar Economic Moat | Wide or narrow moat | 1 |
| 18. Long-Term Debt Rating | Investment-grade (Moody’s) | 1 |
| 19. Short-Term Debt Rating | Investment-grade (Moody’s) | 1 |
| 20. Index Outperformance | Beats S&P 500 or Nasdaq 100 over 10 years | 1 |
| 21. 10-Year Revenue Stability | Consistent revenue | 1 |
| 22. 10-Year Net Income Stability | Consistent net income | 1 |
| 23. 10-Year Profit Margin Stability | Consistent margins | 1 |
| 24. Free Cash Flow | Positive and steady over 10 years | 1 |
| 25. Dividend Consistency | Maintains or increases dividends | 1 |
| 26. Decreasing Outstanding Shares | Fewer shares over time | 1 |
| 27. ESG Risk Rating | Negligible or Low (Morningstar) | 1 |
| 28. Dividend Cut Risk Score | Below 40% using my calculator | 1 |
| 29. Piotroski Score | Above 6 | 1 |
| 30. AI Earnings Call Sentiment | Classified as “positive” | 1 |
Max Score: 30
Rating (out of 10) = (Total Score / 3)
1. Blue-Chip Stocks
I stick with companies known for being stable, financially solid, and reliable. Most of them have familiar names and strong reputations.
2. Brand Ranking
The brand ranking is an indicator of a company’s reputation and market presence. I will focus on companies that are ranked within the top 500 globally. To see the brank ranking of the company, I will look at this website.
3-5. The 10-Year Annualized Growth
Any company posting at least 10% annualized growth in revenue, net income, and EPS over 10 years scores well here.
6. The P/E Ratio
I prefer when it’s in line with or below the industry average—too high can mean overpriced.
7. Net Profit Margin
Over 15% gives me confidence in the company’s ability to manage costs and keep dividends flowing.
8. Dividend Payout Ratio
Below 70% is my benchmark, so there’s some breathing room if profits dip temporarily.
9. Dividend Yield
I typically aim for yields above 2%.
10-12. The “Return” Ratios
Over 10% in these areas tells me the company is using its resources in a productive way.
13-14. Debt Ratios
A debt-to-equity ratio under 2 and a debt-to-assets ratio below 0.33 show a healthier balance sheet.
15. Price to Book Ratio
The price to book ratio has to be below 3. A too-high ratio may signify overvaluation.
16-17. Morningstar Ratings
I will also look at Morningstar‘s fair value and the economic moat to assess the intrinsic value and the competitive advantages of a company. I will therefore focus on stocks which are undervalued and which have a wide/narrow moat according to Morningstar.
18-19. Debt Rating (Long and short term)
Investment-grade ratings from Moody’s suggest lower risk.
20. Index Outperformance
I will focus on stocks which have beaten the reference index (mainly Nasdaq 100 or S&P 500) over the last 10 years.
21-23. Stability Over the Last 10 Years
I will prioritize companies that have demonstrated steady revenue, net income, and profit margins over the last decade.
24. Free Cash Flows
Free cash flows have to be positive and steady over the last 10 years. FCFs are a sign of a company’s ability to generate surplus cash, which can be used for dividends.
25. Dividend Consistency
Companies which are able not only to maintain their dividends but also to increase it over the years often indicates that the company is well managed and committed to shareholder value.
26. Decreasing Number of Outstanding Shares
A decreasing number of outstanding shares over the years can boost share value. Indeed, less outstanding shares can potentially lead to an increase the earnings per share and the dividends per share and a decrease in valuation ratios (such as P/E or P/B ratios)
27. ESG Risk Rating
This criteria was not part of my strategy in the beginning. I have decided to add this 27th criteria, in January 2024. Thanks to this rating I can assess at which level the ESG risk could impact a company’s financial health. The risk assessment is performed by Morningstar. Morningstar assesses the ESG risk at 5 levels: Negligible, Low, Medium, High and Severe. I will focus on companies which are at “Negligible”, “Low” level. See below an example with Exxon Mobile, ticker XOM:
28. Dividend cut risk score
I developed a tool called the “dividend risk cut calculator” which gives dividend cut risk score based on 8 metrics. You can try this tool here. Ideally, the stock should have a dividend cut risk score below 40%.
29. Financial Strength Score (Piotroski Score)
The Piotroski Score is a financial metric developed by Joseph Piotroski to assess the financial strength of a company based on nine fundamental criteria. These criteria are divided into three categories:
- Profitability (4 criteria): Measures whether the company is generating profits and positive cash flow.
- Leverage, Liquidity, and Funding Sources (3 criteria): Evaluates the company’s financial stability and debt levels.
- Operating Efficiency (2 criteria): Assesses improvements in margins and asset turnover.
Each criterion is scored as 1 if the company meets the condition and 0 if it does not. The total score ranges from 0 to 9, with higher scores indicating stronger financial health. More info here.
Ideal Score
I will focus on stocks with a Piotroski Score above 6. it is generally considered a good indicator, suggesting a financially solid company with strong fundamentals.
30.Last Earning Call AI Sentiment Analysis
I retrieve the last earning call and use the OpenAI API to make a sentiment analysis.
Here the prompt: “Analyze the sentiment of the following earnings call transcript.
Management often sounds optimistic, but read between the lines. Identify any cautious language, concerns, or risks mentioned.
Even if the tone is generally positive, consider if there are hidden warnings about future challenges.
Based on your analysis, classify the sentiment as:
– “positive” if the outlook is truly strong with no major concerns.
– “neutral” if optimism is mixed with some risks or uncertainties.
– “negative” if there are significant concerns despite a positive tone.
Only respond with one word: “positive”, “neutral”, or “negative.”
If it’s genuinely “positive,” that’s one final point.
After assessing a stock on the 30 above criteria, I will assign a score out of 30. I will then translate it into a grade out of 10, which will provide a clear indication of the stock’s potential as a dividend investment. By picking stocks which meet most of the 30 criteria, I aim to identify dividend stocks with the potential for capital appreciation and solid dividend payouts.
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