The BEST Dividend Stocks Have These 3 Things ✅

So guys, over the past six years, I've spent thousands of hours researching and analyzing different companies. And one of the biggest things I've learned is that the best dividend stocks aren't great investments just because they pay a dividend. Above all, they're great investments because they're great businesses. And when you look under the hood of these businesses, the best dividend stocks tend to have three fundamental things in common. So in this video, we're going to break down each one. I'll explain why they're so important to look for in an investment, and then we'll check out a few stocks that check all three of these boxes. Before we get into it though, in case you're new to the channel, my name is Ryan and here we talk all about dividend investing and how you can use it to create passive income and reach financial freedom. So, if you love dividend investing and if you're on a mission to retire early, then hit that subscribe button. We are less than 3,500 subscribers away from hitting 100,000 here on the channel. And I'd love to have you along as we continue to grow our portfolios and collect that cash flow. Now, guys, the first thing that you want to look for in an investment is consistent revenue growth. And if you're newer to investing, revenue is just the total amount of money a company generates from selling its products or services. So if a company sells $10 billion worth of products this year, it generated $10 billion in revenue. You also sometimes hear this referred to as sales or the topline of a company's income statement. In my opinion, revenue really is the lifeblood of vetting business because if a company is consistently able to grow its sales year after year, that's a pretty clear sign that there's strong demand for whatever that company sells. Now, generally speaking, there are two basic ways a company can organically grow its revenue. It can sell more of its products or services, or it can charge more for them. And ideally, a great business is going to do some of both. It can continue attracting new customers and selling more of its products while also gradually raising its prices over time. And that second part is especially important because that pricing power, which is what we call a company's ability to continue raising its prices, is one of the strongest competitive advantages a business can have. If a company can continually raise its prices without alienating its customers, that tells us something about the value of whatever that company is selling. You know, maybe that company has an incredibly strong brand like Starbucks as an example. Maybe switching to a competitor would be more trouble than it's worth. Like if you're a customer of ADP, or maybe its product is essential to its customers and there isn't another viable option like waste management. Whatever the reason, its customers are essentially saying even at this higher price, this product or service is still worth paying for. And when you combine that pricing power with the ability to gain new customers over time, you have a great recipe for strong revenue growth year after year. And that's exactly what you want to see. Now, showing a few good examples of this using some of the companies that we mentioned a moment ago. Starting here with Starbucks. As we can see, with the exception of 2020 here, Starbucks has consistently grown its sales year after year. And a lot of people like to hate on Starbucks for being overpriced coffee. A lot of people just say it's expensive bean water. But clearly there's a lot of people out there who feel differently and like the company and its products enough to continue spending an increasing amount of money there. And by the way guys, the charts that we're looking at are coming from Simply Safe Dividends, which is such a great platform. I think this is a mustave for all dividend investors. And if you want to check it out, you can actually do so for free in the description of the video. You can try out Simply Safe Dividends with a one month free trial. I hope you check it out. I think you'll really like this one. Like I said, it's a must have for dividend investors. But anyway, getting back to it, ADP was another example that we briefly talked about. As we can see, sales just go straight up and to the right without skipping a beat, which really just speaks to how sticky a payroll software company can be. I mean, once you've established your business using this software and have everything embedded in rocking and rolling, it's kind of a pain in the butt to switch, which is why we see the sales just continue going straight up and to the right. And then last but not least here, we have waste management. Once again, sales just consistently go up and to the right, which is no surprise. I mean, one thing that is constant, one thing that will always be true is that people will always have garbage. They'll always have trash, and someone's going to need to deal with that, which is why you pay waste management. And you really don't have any other option either. Now, with that said, revenue growth by itself doesn't automatically make these businesses great investments. But each of them is generating more sales every year, which tells us that the demand for what they're selling continues to grow. Now, compare that to a company like VF Corporation here. This is the company that owns brands like Vans, Dickies, Supreme, Jansport. As we can see over here, the revenue growth is a totally different story. This peaked back in 2022, and pretty much every single year since then, sales have been declining. Now, once again, this by itself doesn't automatically make VF Corporation a bad investment. There could be a number of reasons why the sales have been declining. But all else being equal, you know, which of these businesses would you rather own for the next 10 or 20 years? The one that continues selling more and more every year, or the one whose sales are starting to bleed out? I think it's a pretty easy answer. With that said, growing revenue really is just the starting point because we need the company to take those sales and turn them into something that they can return to us as shareholders. And that brings us to the second thing that you want to look for in a great dividend stock, and that is growing free cash flow. Now, if you're unfamiliar with free cash flow, this is essentially the cash that a business has left over after paying for all of its expenses and after making all of the investments it needs to in order to maintain and grow the business. Free cash flow is incredibly important because this is the money a company has ultimately to do things that benefit both the business and us shareholders like paying down debt, buying back shares, making acquisitions, or last but not least, paying us a dividend. So, if we're looking for a company that has the capacity to grow its dividend over a long period of time, ideally we want to see that that company is also increasing the amount of free cash flow it generates over time as well. And that doesn't mean that free cash flow needs to generate literally every single year. In fact, in a lot of cases, for a lot of businesses, free cash flow tends to be a bit lumpy. There are naturally going to be years where a company spends more money, makes different investments in the business, or maybe it goes through a tougher operating environment. All of these things will likely happen over a long period of time. When it comes to the free cash flow, and really this is true for the revenue as well. What you want to look for is the long-term trend. In other words, over a period of 5 or 10 years, is this business generating more free cash flow than it was before? Because as dividend investors, the last thing that we want to see is a company whose ability to generate cash is going nowhere. We want to see more cash over time because that's what's going to support a higher dividend over time. Now, looking at a good example here, I can't think of a business that prints more cash consistently than Visa. I like to call Visa the gold standard of stocks, and the free cash flow chart right here is one of the reasons why. The earnings is looking pretty good, but we're focusing right now on the free cash flow per share. And as we can see, there is a little bit of lumpiness, a little bit of ups and downs, which like I said earlier is to be expected, but the general trend is clearly straight up and to the right. This is exactly what you want to see. And on top of that, if we scroll down, looking at the free cash flow margin, for every dollar of revenue that comes in, at least in the trailing 12 months, 48 cents of that is converted to free cash flow, which is incredibly high. Visa is very profitable. And in the past, it's been even higher. Like in 2022 right here, 67 cents of every dollar that came in the door was converted to free cash flow. That's crazy. Now compare this to a company like Leed and Plat here. The free cash flow chart is kind of the opposite of what we saw with Visa. This one's actually decreasing over time, which is no bueno. And actually, if we scroll up looking at Leed and Plat's dividend history, they used to be a dividend king. There was a period of time where they had more than 50 years of dividend growth, but as we can see a couple of years ago, they cut the dividend not once but twice because they didn't have enough cash flow coming in to support the dividend. This just goes to show that at the end of the day, the dividend has to be supported by the cash the business generates. With that said, even if we do find a company that's growing its revenue and also growing its free cash flow, there is still one more piece to the puzzle. We need to know how much of that cash flow is already being paid out to us as shareholders in the form of a dividend. And that brings us to the third thing that you want to look for in a great dividend investment, and that's a conservative payout ratio. Now, in case you're not familiar with the payout ratio, this metric tells us what percentage of a company's profits or free cash flow is being paid out to shareholders as dividends. And for our purposes here, we're just going to focus on the free cash flow payout ratio. So, as a really simple example, let's say a company generates $1 billion in free cash flow and pays out $400 million in dividends. So that would give us a free cash payout ratio of 40%. Which means the other $600 million is being retained by the business. Now generally speaking, the lower a payout ratio is, the more flexibility a company's going to have with its dividend. And I'd like to see some sort of margin of safety here. It's a bit concerning when we see a company dedicating all of its available free cash flow just to paying the dividend. Let's go back to that same company, though, generating a billion dollars in free cash flow and paying $400 million in dividends. Imagine that over the next 5 years, the company's free cash flow goes absolutely nowhere. 5 years from now, it's still generating the same $1 billion, but during that time, management continues raising the dividend every single year. And eventually, instead of paying out $400 million in dividends, the company's paying out 700 million. That means our payout ratio has climbed from 40% all the way up to 70%. So, obviously, the dividend grew, but the amount of cash supporting the dividend did not. And really, there's only so long that you can get away with that before it becomes a problem. If free cash flow continues to stay flat while the dividend continues growing, eventually that payout ratio is going to get higher and higher until the company has no more wiggle room. Which is why the second and third things we've talked about really go hand in hand. We want free cash flow growing over the long run because ideally that allows the dividend to grow right alongside it without the payout ratio becoming too high. And we also want a reasonable payout ratio to begin with because that gives the company room to breathe. If the business hits a rough patch and free cash flow temporarily drops, a company paying out 40% or 50% of its free cash flow has a lot more room to absorb that decline than a company already paying out 90% of its free cash flow. And on the other side of things, a lower payout ratio can also give the company more room to increase the dividend overtime if they want to. In my opinion, a great example of this in action is William Sonoma. As we can see, their free cash flow payout ratio over the past decade has been very conservative, peaking at 43% back in 2018, which in itself is still a very low payout ratio. That still gives the company a lot of optionality, but as time has gone on, the free cash flow payout ratio has actually gone down. And in the last 12 months, it's only about 30%, which is very low. Now, on the other side of that, one company whose free cash flow payout ratio has gotten very concerning, I actually just recently talked about this in a different video, but this is Veil Resorts. As we can see, it used to be pretty conservative. About a decade ago, it was only 34%. But over the years, that free cash flow payout ratio has consistently ticked up. And in the last 12 months, the free cash flow payout ratio was 182%. So, they were almost paying out twice as much in dividends as they were generating in free cash flow, which like I said, there's only so long a company can do this before it becomes a problem. Now, having said all of that, when you put all of these things together, revenue growth, free cash flow growth, and a margin of safety in the payout ratio, I think that all of these things combined create a great recipe for long-term dividend growth. If a company is consistently growing its revenue, that tells us that demand for whatever it sells continues to grow. Then, we want to see that translate into growing free cash flow because ultimately, that's where the dividend comes from. And if a company is paying out a reasonable percentage of that free cash flow is dividends, well, then it has plenty of room for that dividend to continue growing with the business. And that's really what we're looking for over a long period of time. At the end of the day, the growth of the dividend is really only possible if the business itself is growing. And that's why I think that the best dividend stocks aren't necessarily the ones with the highest starting yields or they're not the ones with the longest dividend growth streaks. Those things are great, but really the best dividend stocks are just great businesses that just so happen to pay a dividend. It all goes back to the underlying business. And now I want to look at a handful of examples that possess all of these great qualities. The first company I want to look at, guys, is Rollins. And as a lot of you know, this is the newest addition to my portfolio. Sales are looking fantastic. Without skipping a beat, year after year, they're generating more and more revenue than the last. And Rollins has done a great job of taking their increased revenue and converting it to free cash flow. This chart looks pretty identical to what we saw in the sales. A little bit of lumpiness, but honestly, not much. Very consistent free cash flow growth. Scrolling up one more time, looking at the free cash flow payout ratio. This is also in great shape. It looks like in the past 12 months it was about 56%. Still plenty of wiggle room for the company to maintain and grow the dividend and also retain some forms themselves to make more acquisitions or do whatever they're going to do to continue growing the business. Moving on, stock number two guys is going to be into it. Simply Safe Dividends gives them a 98 for the dividend safety score which is fantastic. And right now the starting yield might not look that high about 1 and a.5% but as we can see this is way above the company's 5-year average just because the share price has dropped so much. So, into it might be looking like a good buy right now. Fundamentally speaking though, just like with Rollins, sales have not skipped a beat. Straight up and to the right every single year. And actually, their sales are growing at a pretty aggressive rate as well. There isn't a single year over the past decade where the sales growth was less than double digits, which is very impressive. And look at this free cash flow chart once again, straight up and to the right. That's looking like a real work of art. And even the profits are consistently growing as well. Earnings per share doesn't skip a beat either. And then looking at actually both the payout ratios right here. earnings payout ratio and free cash flow payout ratio. These were low to begin with. Back in 2016, we're looking at 32% for the earnings payout ratio, 34% for the free cash flow payout ratio, just slightly higher, but both have been decreasing over the years. So, they are still growing the dividend pretty aggressively, but the fundamental growth, the profit growth and the free cash flow growth is actually faster than the rate at which they're growing the dividend, which is why we see the greater coverage over time. Moving on, stock number three is Brown and Brown over in the insurance industry. They have a dividend safety score of 99. And it really doesn't get much better than that. The starting yields coming in at 0.9%. So, not the highest starting yield, but kind of like with into it, this is way above the company's 5-year average. So, it may be a good time to look into it just based on the valuation. Scrolling down, looking at the sales once again, what can we say? Very consistent, and it actually looks like the sales growth is picking up over the years. If we scroll up just a little bit, it certainly is. Back about a decade ago, we were looking at mid to high singledigit growth, but I mean now we're getting upwards of 22%, 35%. So this company's really starting to take off. Similarly, the free cash flow growth is very impressive. I don't think there's really a year where free cash flow was lower than the previous year, maybe with the exception of of right here, but everything else is looking great. This is exactly what you want to see. It doesn't skip a beat. And like with into it, the free cash flow payout ratio is decreasing over time. We were looking at 18 19% about a decade ago, which is still very low, but nowadays it's 15%, 14%, and may even continue going lower from there. So, I think all of those are looking like excellent dividend growth stocks. And if you want to see the complete opposite, if you want to learn about a few stocks that are showing some pretty major red flags, then check out this next video right over here. In this one, I'll show you three dividend stocks that I think could be at risk of cutting their dividends. In fact, one of them already has. One of them completely eliminated their dividend. And in this next video, I'll show you why I'm concerned about each one. So, click right over here to learn about those.