Dividend Growth Stock Selection Criteria: 5 Filters and the Final Test

In October 2019, I bought one share of Broadcom (AVGO).

The reasoning was simple. The dividend yield exceeded 4%, and the Dividend Growth Rate (DGR) was over 10%. My goal was the dividend. I had no idea how much the stock price would rise, nor did I try to predict it.

Fast forward six years. The total return has cleared 932%. The dividends have arrived like clockwork every year. Even after trimming the position for profit-taking because it grew too large, it remains in the TOP 10 of my portfolio.

I didn’t pick this stock because I foresaw the AI era. I picked it because it met my criteria.

Here are those criteria.

1. DGR — Is the Dividend Beating Inflation?

The Dividend Growth Rate (DGR) is the cornerstone of dividend growth investing. It measures how rapidly annual dividends are increasing.

A single year of growth is irrelevant. I look at the 3-year, 5-year, and 10-year Compound Annual Growth Rates (CAGR)

Period	Minimum Criteria	Ideal Level
3-Year DGR	Above 5%	Above 8%
5-Year DGR	Above 5%	Above 7%
10-Year DGR	Above 4%	Above 6%

The 5% threshold isn’t set in stone. The real benchmark is simple: It must beat inflation.

In a 4% inflation environment, a 4% DGR means your real purchasing power is stagnant. Even if the dividend check is larger on paper, its utility remains the same. That is not true growth. In dividend growth investing, anything that fails to outpace inflation is effectively standing still.

AVGO’s current 5-year DGR is 12.63%. It was over 10% when I first bought it. That number was my primary logic for entering the position.

The 3-year DGR reveals recent momentum. The 10-year DGR proves the company’s attitude toward shareholders. One word of caution: if the 3-year DGR spikes suddenly, check the source. It might be a one-time special dividend or a base effect from a prior year.

2. Dividend Increase Streak — How Long Has it Been Growing?

How many consecutive years has the company raised its dividend? The longer the streak, the more proven the company’s commitment to returning capital.

Financial crises, global pandemics, and spiking interest rates—some companies raised dividends through all of it. That history is their pedigree.

Dividend Aristocrats: 25+ years of consecutive increases (for-S&P 500 constituents)
Dividend Kings: 50+ years of consecutive increases

When I first started building my portfolio, I set a conservative threshold of 10+ years. I wanted companies that had survived both the 2008 Financial Crisis and the 2020 Pandemic without cutting their payouts.

However, sticking strictly to this limit narrows your options significantly, especially in the tech sector where dividend histories are often shorter. As my portfolio stabilized, I broadened my scope to companies with at least 5 years of payout or growth history. This allows me to capture high-growth companies that are earlier in their dividend lifecycle.

3. Payout Ratio — Is the Dividend Sustainable?

The Payout Ratio tells you what percentage of net income is being paid out as dividends.

If the payout ratio is 90%, it means almost all profit is going out the door. If earnings dip even slightly, the dividend is at risk. There is no room for growth.

I look for a ratio of 60% or lower. The 40–50% range is my “sweet spot.” It allows the company to reinvest in itself while still growing the payout.

One exception: Sector matters. REITs, by law, often have payout ratios exceeding 90%. You must judge a company within the context of its sector.

4. FCF — Can Cash Flow Cover the Checks?

The payout ratio is based on net income (accounting profit). But dividends are paid in cash, not accounting entries. A company can have “profit” but no cash on hand.

This is why I always check Free Cash Flow (FCF). If the FCF Payout Ratio is 70% or lower, I consider the dividend shielded.

Furthermore, a company with consistently growing FCF has the fundamental fuel to keep raising dividends indefinitely.

5. Business Moat — Can it Generate the Same Cash 10 Years From Now?

A company with great numbers but a weakening business model is a trap.

My assessment is simple: “Can this company’s customers easily switch to a competitor?”

Businesses with high switching costs, powerful brand loyalty, or strong network effects maintain their cash flow even in recessions. This is why companies like Coca-Cola have sustained dividends for over a century.

Narrowing Down the Field

I filter my candidates in this order:

Dividend Streak: Initially 10+ years / 5+ years for established portfolios.
5-Year DGR: Above inflation, usually 5% minimum.
FCF Payout Ratio: Below 70%.
Earnings Payout Ratio: Below 60–70% (adjusted for sector).
Business Moat: Validating the qualitative edge.

Few companies pass all five tests. This results in a concentrated portfolio. Concentration isn’t a flaw; it’s the result of keeping only what is proven.

The Final Gate — Can it Beat SCHD?

Even if a stock passes all five filters, I subject it to one final comparison: SCHD.

SCHD (Schwab US Dividend Equity ETF) is a gold standard for dividend growth investing. It holds roughly 100 stocks, rebalances automatically, and has a stellar record of growth. Its DGR and yield are high bars for any individual investor to clear consistently.

If the individual stock I’ve selected has a lower DGR and a similar or lower yield than SCHD—I just buy SCHD. There’s no reason to take on individual stock risk for inferior returns. Plus, you get the benefit of automatic diversification.

I only pick an individual stock if it offers something SCHD cannot: a significantly higher DGR, specific sector exposure, or a business model I personally understand and believe in. I pick individual stocks only when the “Why” is undeniable.

YoC is a Result, Not a Criteria

One final note.

If you buy AVGO for the first time today, your starting yield is 0.52%. Because I bought in 2019, my Yield on Cost (YoC) is 5.40%. Same stock, different reality.

Yield on Cost (YoC) is a lagging indicator. It is not a selection criterion. It is the natural result of picking a high-quality company and holding it through the growth cycle.

I don’t pass on a great company just because its current yield is low. Similarly, I don’t pick a poor company just because its current yield looks high.

Pick the quality business first. The YoC will follow.