I look for three things in dividend stocks. Number one is pretty easy – yield. You can easily look it up and compare with other stocks. High is good, but remember an excessively high yield often means the market is expecting a dividend cut.
Two, relative earnings growth to share price. That's done through the PEG (price-earnings to growth) ratio. A high PEG may mean the high yield is camouflaging low growth out of whack with a high share price.
Thirdly, dividend payment history gives me an idea of what to expect in the future. If dividends fall or even disappear and don't have a reliable payment pattern, that signals a possible fault in the company. Good dividends should be more like bank deposit interest in giving steady income over many years.
Here are three stocks that would tick off all three conditions. This gives me confidence to invest in what I believe are some of the best dividend stocks in the S&P/ASX 200 Index (ASX: XJO) (Index: ^XJO).
IOOF Holdings Limited (ASX: IFL) provides financial products and portfolio administration services like superannuation, annuities, investment trusts and financial planning. It has a 5.0% fully franked dividend yield and has a good track record for increasing dividends. Its PEG is 1.83, which is getting close to 2, where I start drawing the line for price versus growth. Super and SMSF demand is high as more people save and prepare for retirement, so the higher PEG could balance out in several years.
Automotive Holdings Group Ltd (ASX: AHE) has the largest auto dealership network in Australia, as well as now being the operator of the biggest refrigerated transport and warehousing business nationwide. The stock offers a healthy 5.4% yield fully franked. Dividend payments have been stable and steadily rising over the past five years. Its 1.5 PEG is becoming more attractive as its growth through acquisitions has picked up.
Woodside Petroleum Limited (ASX: WPL), the energy producer, has already been successful with several LNG projects near WA, but now is looking for growth further afield in Africa and South East Asia. The stock currently offers an attractive 5.3% fully franked dividend. Dividends have more than doubled since 2009 thanks to its steady LNG revenues that will also go toward funding its next development projects. It has a low 0.81 PEG, which means its projected earnings growth rate is higher than its PE ratio. If the projections hold to be correct, then I believe you have a bargain here.
