What is a good dividend stock?

People buy stocks with the objective the ownership in a company will earn them money. There are three ways to profit from stock ownership; growth in the value of a share, acquisition of more shares, and receipt of dividends.

Value grows with rising earnings. Companies that pay dividends  also increase in value as the dividend rises, with one caveat; the earnings have to be rising as well.  Another way to see one's personal stake grow is if the company is reducing share count by buying back and retiring shares. If the company is merely buying back shares to offset large executive options grants, then buybacks probably won't do much to grow value. A declining share count with static earnings results in higher earnings per share and rising stock price.  A declining share count with rising earnings is a ticket to substantial capital gains.

If you are buying dividend paying stocks it makes sense to look for stocks whose dividends are rising over time.  Rising earnings and rising dividends means more cash in your pocket, as well as rising valuation of your holdings. if you then add in reinvestment of dividends, the virtuous cycle of compounding accelerates the value of your growing position.

So how do you spot a good investment prospect?

Start with a history of rising earnings.  Determine the rate of growth in earnings over 5 and 10 years
Check against rising earnings per share, and growth or decline in share count.
Look for rising dividends. Determine the rate of growth of dividends over 5 and 10 years.

A smart investor who writes on Seeking Alpha recommends that stocks meet a threshold of
dividend yield + dividend growth rate over 5 years >/= 12.  For REITS and MLPs, >/= 8

Understand that a company paying 2% dividend with a 10% dividend growth rate will take some time to double the dividend; 7 years to be exact. During that time, share count isn't growing all that fast, but you hope that valuation is growing, if the majority of earnings are retained to reinvest in the company, or retire shares.

The REIT or MLP, which tend to have higher dividend payments, will result in more rapid share accumulation if you are reinvesting dividends, so a slower growth in valuation will still yield an acceptable total return.

I tend to be a "show me the money" kind of guy, so I have tended to purchase higher yielding companies and have allowed the DRIP to accelerate the total yield. 

I have learned the hard way that high dividend paying companies are more risky, because anything that effects earnings puts the dividend at risk, and a dividend cut always produces a big loss in valuation of shares.  If you want to follow WB's first rule; "never lose money", you'd better avoid dividend cuts. That means buying companies whose earnings are rising and who can easily cover the dividend out of operating cash flow.

So, the ideal dividend growth stock is one where earnings rise steadily, the dividend rises steadily and the dividend is well covered by cash flow.

There are a number of other things to think about;  On what are earnings dependent ?  mREITs earnings are dependent on interest rate spreads. Drilling company's earnings are often dependent on the price of oil. If prices drop, drilling slows. Drilling companies with lots of debt incurred to buy expensive driling equipment will be at risk for plummeting earnings and loss of dividend payments.
So what about debt?  Is debt covered well by earnings? In the case of utilities, they carry substantial
debt, but earnings are assured through regulated rates. The last thing people do is turn off the electricity, even in hard times. So, lower payout ratios mean plenty of room for dividend growth.

Finally, if earnings growth rates are declining, dividend growth rates are declining, it may be time to move your money elsewhere. 

I have come to the conclusion that low volatility and reliable and steady total return in the 8-10% range is a very acceptable goal. "Beating the market" is a fools game. A 3% dividend, reinvested and 5% growth rate in valuation can be quite adequate, if it is relentless. The fact is, large cap, blue blood dividend paying stocks are returning 8-15% per year total return and you don't have to find hidden gems to do very well. I am increasingly confident that I can manage my own retirement savings with acceptable yields and very low costs of investing and never access another "expert" again. After building a foundation of some of the best dividend stocks in the world, I'm now adding some lower yield, faster growth companies to the mix.

There's lots to learn about picking dividend stocks, but the good news is there's lots of help. The Dividend Champion, Contenders and Challengers list is extraordinarily helpful. Seeking Alpha Dividend and Income Investing has  a number of excellent writers who can clarify important concepts. I learned what I know by reading, reading, reading. I have made my mistakes. I'll certainly make some more. On the balance, though, I'm doing pretty well managing my own future security.