3 Simple Steps – Dividend Stock Selection Process

Stock SelectionIn my 7 Dividend Investing Rules, my first four rules pertain to my stock selection strategy. As you can probably imagine, selecting what you invest in plays a big part of your portfolio building strategy. My focus is on the portfolio and not just the individual stocks I purchase. In fact, I am never solely focusing on the price I buy a stock at as over time, a great stock will grow and I get paid in the meantime to hold the stock.

When you start investing, the overall portfolio structure is not your first thought. You are looking for a good blue chip stock to invest in and you usually start with a small amount. It was the case for me when I started so I understand where you are coming from. With a full portfolio now, I also understand the need to manage the investments in the portfolio through sector diversification and dollar cost averaging. What is consistent between the different portfolio size is how I chose stocks for my dividend income portfolio. It took me a few years to setup my process and I hope it can help others. The crux of it is that you need data which is why I have a master list also known as the Canadian Dividend Performance List.

You don’t want to follow the news to buy a stock. The news look for a sensational story and it creates a heard mentality. It triggers emotions and it’s important to make investing decisions based on data and not emotions.

Dividend Stock Selection Process

Step 1 – Master Stock List

Let me first say that you never know what you don’t know. If you don’t have a stock list, you are navigating without a map. If you have a stock list, but it only list companies you like, you may be missing gems.

I made all of those mistakes in the past and because I could not find a list I could actually use with all the data I wanted, I built my own. I will admit that I do not have small cap stocks in the list for now even if they pay a dividend and have a good history of paying dividends. It usually means the companies do not have an economic moat.


There are many ways to start. I provide a list over at Dividend Snapshot with over 100 stocks, a ranking, and 10 years of data. You can use the Dividend Aristocrats list although the Canadian list is weak. You can use the stock screener over at TMX Money. There are some lists outlined at DRIPInvesting as well.

Step 2 – Narrow Down Stocks By Sector

If you are starting, many sectors may be of interest otherwise, you may have a sector in particular. I am particularly found of having a sector strategy to help mitigate risks during market swings.

Below is a chart showing how each sector usually does during a recession. I am not particularly interested in moving between sectors to take advantage of the cycle as I would need to know when it starts and when it ends. I do not have the skills not the inclination to time the recession markets. However, there is one sector that is most vulnerable and it is why I do not have a large exposure to the Consumer Discretionary.

Sector Rotation
Source: RBC Stock Selection Strategies

I have a sector allocation strategy and when I have money to invest, I look at which sector needs some money added to it. It allows me to narrow down on that sector. I will obviously take into account a great deal in another sector, but as you can see with the recession map above, there is movement and it can help add to current holdings at a lower price. It’s like an automated and unbiased buy low process and it keeps the emotions out of play.

Step 3 – Find a Good Fit From The Short List

Dividend Snapshot
In this step, I combine the list of stocks I use with the sector my portfolio needs to target. This process eliminates a lot of stocks that you don’t need for your portfolio at this point in time.

With the short list, you can easily eliminate stocks that do not match your investing fundamentals. For me, those three criteria are important.

  • Invest only in companies where I understand the core business principal.
  • Invest in companies that provide a necessities.
  • Invest in companies that have an economic moat.

Once I have reduced the list to the companies with my core investing principles, it’s time to look at the dividend.

  • Any companies matching the 10/10 rule moves up the list.
  • Any companies with a higher yield than normal (i.e. price is down) moves up the list.
  • The higher the yield the better but it’s not a requirement – think CNR for example.

I usually end up with 2 or 3 companies to choose from at this point. No emotion was involved. It’s pure analysis and filtering. If I have the choice to add to a holding, I might do so depending on how many stocks I have. I like to have more than 1 stock per sector too.

It’s a very simple process once you are setup. You need a master stock list and a way to easily see where your portfolio is at – make use of a spreadsheet.

Image courtesy of Stuart Miles – FreeDigitalPhotos.net

7 Responses to "3 Simple Steps – Dividend Stock Selection Process"

  1. As a dividend investor who has diversified my portfolio into a systematic method of investing in long-term trending stocks I really like this approach.

    I have found that what works best for me is having a proven system that diversifies my portfolio (but not too much) across stocks that have been selected based on real stringent rules. Anytime I have let intuition or emotion get in the way, the decisions are poor.

    One thing I don’t see on your blog is the idea of position sizing – are you strictly a buy and hold investor and allocate whatever capital you have to new positions or do you look at the risk in the positions you are buying and allocate a certain percentage of your capital to that chosen stock?

    P.S. That is in no way a criticism – just truly wondering what your approach on that is!

    1. @Jeremy

      Thanks for your comment.

      I do consider how much I put in a position but I don’t have a hard and fast rule. With 3 types of accounts, I find it hard to apply a fast and hard rule because the accounts have disproportionate amount of money. As I grow them, I do pay more attention.

  2. Please help me interpret the graphic.
    Is it saying that, for example, if u think the economy is in the early recovery stage, that you want to put money into Transports?

    1. @Frank
      That’s correct. Economist and banks track those behaviors and are showing the movement. Many investment managers also follow that.

      The goal is not to learn on to time those but to show that it is cyclical and that if you track your sector allocation, you would see that somehow if you compare to a target. Based on when you have money available to invest, you should technically add to the underperforming sector in your portfolio.

  3. I am not familiar with the 10/10 rule. Could you please explain. Enjoyed reading your “7 Rules” as well. Wish I had been aware of these concepts several years ago (although have utilized similar with modest success). HB


Post Comment