Owning a good dividend stock is like owning a quality piece of investment real estate.

You get paid cash frequently – cash you can use as regular income, or to invest back into more assets (stocks/real estate) to get paid even MORE cash!

If your property/stock is really good, you will even get increasing cash flow from it year after year. For good investment properties, you are able to consistently raise rental rates. For good dividend stocks, the company raises its dividend payout year after year.

You also benefit from the appreciation of your asset. Buying a high yielding, quality dividend stock when it is temporarily out of favor in the market is akin to purchasing that edge-of-town beachfront property before the town expands around it and demand skyrockets. By the time you go to sell either, you could realize a doubling, tripling, or even more of your original investment.

In fact, dividend stocks are even better! There are no property management companies to deal with, no property taxes, transaction costs are minuscule, and dividend stocks are fully liquid (you can sell them in minutes). Plus, you don’t have to worry about a hurricane flooding your dividend stock!

Key Questions When Buying Dividend Stocks

Like real estate, though, succeeding in dividend stocks requires due diligence on a few key factors. First, are you buying the asset at a price that is below a reasonable estimation of its value? Second, are its current cash flows secure (i.e., do you have to worry about cash flow *decreasing*)? Third, is the firm financially strong enough to support future dividend hikes?

To answer the first question, we rely on stocks from the “Magic Formula” screens. Against the market, these trade at the lowest levels against their recent earnings and (usually) cash flows, meaning it is highly likely they are below a reasonable fair value. As always, we do some due diligence to ensure that is indeed the case.

The 2nd and 3rd questions require some investigation into the company’s prospects and a deeper dive into its financial situation.