3 Rules to Pick Dividend Stocks That Never Fail (Checklist)

Intro: The Yield Trap

There is no free lunch. If a yield is suspiciously high (e.g., >10%) vs market avg (2-4%), the market implies risk. This is a 'Yield Trap'.

Rule 1. Payout Ratio Safety Margin

How much of earnings is paid out?

• General Stocks: Under 60% is safe. Over 100% means borrowing to pay divs (unsustainable).
• REITs: Look at FFO payout ratio under 90%.

Rule 2. Dividend Growth History

The rearview mirror guides the future. How did they act during crises?

Companies that survived these (Aristocrats, Kings) have management committed to dividends.

Rule 3. Simple Business Model

"Invest in what you know." (Peter Lynch). Can you predict their cash flow in 10 years?

• Good: Coke, Realty Income, P&G. Stable demand, predictable.
• Bad: Biotech, Trendy Fashion. Hard to predict.

Sticking to these rules reduces risk by 90%. It looks boring, but it's the fastest lane to freedom.