3 Ways To Know If A Dividend Yield Is Good

How To To Know If A Dividend Yield Is Good: Dividend stocks have key benefits versus high growth stocks, including:

  • Help to hedge against inflation.
  • Provide a passive dividend income stream.
  • Offer solid total investment returns.
  • Dividend payments can be reinvested to compound returns

These stocks have long proven to be a successful investing strategy for legendary investors like Warren Buffett.

The 91-year-old Omaha native has become one of the most successful investors in the world by spending years strategically investing in fairly-priced, dividend paying blue-chip companies that feature strong balance sheets.

But what key metrics does Buffett and other dividend investors use to be build wealth?

3 Top Metrics Used to Identify Great Dividend Stocks

While dividend stocks have a lot to offer investors, it’s important to understand what they are and how to evaluate them before putting down any money.

A dividend stock most often refers to a stock that pays or distributes cash to its shareholders from company profits. However, there are multiple types of dividends.

These dividend types can include:

  • Cash dividends: This is the most common type of dividend where companies send cash payments directly into a shareholder’s brokerage account, often quarterly.
  • Stock dividends: Through stock dividends, companies pay out investors with additional shares of a stock instead of cash.
  • Dividend reinvestment programs or DRIPs: Through DRIPs, investors are given the opportunity to reinvest any dividends received back into the company’s stock, usually at a discounted rate.

Top dividend stocks are usually well-established companies that have a strong track record of distributing earnings back to their shareholders.

Additionally, three key metrics often used to identify great dividend stocks are:

  • payout ratio,
  • dividend growth rate, and
  • cash flow.

1. Payout Ratio

One metric that investors should pay close attention to when evaluating dividend stocks is the payout ratio.

A payout ratio is the percentage of a company’s overall earnings that is used to fund its dividend payouts.

While payout ratios will vary between companies, a ratio between 30% to 60% is considered sustainable for most companies.

Conversely, anything over 60% may be a red flag as the company may risk going into debt or may not have enough earnings to push continued growth.

2. Dividend Growth Rate

A second key metric that investors should evaluate when looking at dividend stocks is the dividend growth rate, which refers to how much the dividend has been rising each year.

Stocks considered dividend aristocrats are those that have increased their dividend growth rate annually for at least 25 consecutive years. Dividend kings are stocks that have increased their dividend growth rate for at least 50 straight years.

The ability to continually increase dividend payouts annually for multiple decades highlights a company’s ability to generate enough excess cash flow despite any adverse economic conditions or market downturns.

Overall, a dividend growth rate that increases annually over time is a very good indicator of a strong dividend stock.

3. Cash Flow

Lastly, a third key metric that investors can use to evaluate their dividend stock pick is a company’s cash flow. Regardless of what size a business is or what sector it’s in, any company needs to have more money coming in than going out.

Dividend payouts are often a huge cause of money flowing out of a company. Therefore, it is essential that a company exhibits a strong cash flow in order to continually pay out dividends while still having enough funds to reinvest back into the company for continued growth.

A weak cash flow should definitely be considered a red flag when it comes to evaluating dividend stocks. In addition, strong cash flow provides flexibility to any company. Allowing it to allocate funds for growth, increased dividend payments, or any action it might need for success.

Top Dividend Stocks to Invest in Right Now

Now that you know how to evaluate dividend stocks, it’s time to go to work and start finding the best ones to invest in today.

To help you out as you begin your dividend stock evaluations, we’ve compiled a shortlist of some of our top dividend stock picks.


The Verizon Communications company has been trading publicly since 2000.

The stock began trading under the stock ticker VZ for an IPO price of around $45. 

The company has a market cap of around $215 Billion and an annual dividend yield of 5.15%.


The Chevron Corporation has been trading publicly since 1985. The stock began trading under the stock ticker CVX for an IPO price of around $8 per share.

Chevron has a market cap of around $345 Billion and an annual dividend yield of 3.31%.

U.S. Bancorp

The U.S. Bancorp company has been trading publicly since 1984. The stock began trading under the stock ticker USB for an IPO price of around $1.50 per share. 

US Bancorp has a market cap of $76 Billion and an annual dividend yield of 3.61%

American Express Company

The American Express Company has been trading publicly since 1977. The stock began trading under the stock ticker AXP for an IPO price of around $3 per share.

It has a market cap of $121 Billion and an annual dividend yield of 1.31%.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.