Jeremy Glaser, Markets Editor for Mornigstar.com, discusses the best way to evaluate dividend stocks with Josh Peters, the editor of Morningstar's US publicationDividendInvestor. It is all about asking the right questions in your equity analysis, says Peters. Thus, he has constructed a methodology which seeks to answer the following: (1) Is the dividend safe? (2) Will it grow? (3) What's the return? Peters goes on to explain how he evaluates if an equity meet these three criteria.
Jeremy Glaser: From Morningstar.com. I am Jeremy Glaser: What's the best way to evaluate dividend stocks? Morningstar DividendInvestor editor Josh Peters is here today to answer this question.
Josh, thanks for talking with me today.
Josh Peters: Thanks Jeremy, good to be here.
Glaser: So, for someone who is taking a look at a stock and primarily wants to get yield from it, what are the steps that he should take in order to evaluate it?
Peters: Well, my process is really based on the idea of getting the questions right and knowing which questions to ask about a specific business when you're looking at it for the first time and then subsequently as you're evaluating it. Those questions are, if anything, more valuable than the answers. Anytime you make an investment, no matter how conservative or how much you are trying set aside speculation, you are making projections about the future because that's where your profits lie. Your dividend payments, your capital gains, everything.
In order to frame the question about the uncertain future, I think you have to have a good question. And that's why about six years ago, when DividendInvestor was still very new, I broke the whole process down into three questions that I call my Dividend Drill. All of the three questions are about the dividend. That's mostly what I'm interested in; that's what I expect not just to provide income but also drive the stock performance. So I ask: Is the dividend safe? Will it grow? And what's the return?
Glaser: So let's start with safety. How do you evaluate if a dividend is going to be safe or not?
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