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One of my favorite ways to earn a second income is by owning stocks. That's because as part owner of these companies, I get a piece of their profits.
This often comes in cold, hard cash. The way I love you.
With thousands of options available, the selection process can seem like a maze. But I can narrow down the choices by focusing on certain criteria.
How to sort dividend stocks
For example, the first time I can stick FTSE 100 shares. These are the largest listed companies in the UK. Many of them are big household names.
While this does not guarantee their future fortunes, it can eliminate other potentially high-risk, smaller businesses.
Now I am already down 100 shares. Next, I will focus on dividend yields between 2% and 9%. Less than 2% is too low for a dividend yield, in my opinion. And more than 9% may not be strong.
Dividends are usually paid out of earnings, so there needs to be enough profit in the business to be able to pay shareholders like me. Dividend cover is a measure of how many dividends can be paid out of a company's profits. I focus on coverage greater than 1.5.
Companies that have been paying for many years can be seen as more reliable than those that started recently. That's why I look at the dividend history for at least five years.
Using these simple criteria, my selectionwas down to only 19 games.
4% dividend yield
Today, I'm considering a high-quality dividend stock. It is a giant of power A shell (LSE:SHEL). With a market capitalization of £175bn, it is one of the largest companies in the FTSE 100.
It offers a dividend yield of 4%, a three-period cover and decades of payment history. Its yield is not too large to offer, and it is not too small. But there is more to stock classification than just their yield.
Since payments are usually made from profits, I would look for a continuing profit. So the question I would ask myself is whether Shell will be able to maintain enough cash in the coming years.
The power shift is a big change for companies like Shell. There are risks inherent in all major changes and disruptions to business models, and how it manages change will be closely watched.
It is investing billions of pounds in low carbon solutions, while also focusing on its liquefied natural gas (LNG) operations.
Profits are increasing
Recent gains have been strong. Second quarter profit rose 24% to $6.29bn, and it announced a new share buyback plan of $3.5bn.
When a company buys back its own stock, it reduces the number of shares available in the market. An impact that can increase stock prices and earnings per share.
One of the reasons I consider Shell one of the best dividend stocks is its commitment to improving shareholder returns through buybacks and dividends.
Overall, Shell looks like a very good income share to me. It offers good yields, growing profits and a commitment to returning cash to shareholders.
Once I have some spare cash in my Stocks and Shares ISA, I will be buying for myself.
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