Took me like three years of mistakes to figure out a dividend investing process that actually works. Figured id share since I see a lot of people making the same errors I did.
Step one is dividend safety not dividend yield. I screen for payout ratio below 60% on free cash flow, debt to EBITDA below 3x, interest coverage above 6x. This kills most yield traps before I even look at them.
Step two is checking quality metrics on Valuesense. ROIC trends, earnings consistency, capital allocation track record. I want businesses generating real economic profit not just accounting earnings that disappear when you look closely.
Step three is valuation. Dont need it to be cheap cheap but I dont want to pay a huge premium either. Around historical average PE or below is the sweet spot.
Step four is sector diversification. Cap any single sector at 20% of dividend income. Learned this one the hard way when I was overweight financials and they all sold off together.
Step five is position sizing based on conviction. Higher quality better valuation means bigger allocation. Speculative stuff stays at 2% or less.
Portfolio yields about 3.5% now with 6% average dividend growth. Not exciting but sustainable. And sustainable beats exciting when youre trying to build reliable income.