This article is reprinted with permission from Esq. Wealth Management, Inc.
At EsqWealth, we believe income-generating investments should be both rewarding and resilient. One method we use to identify opportunities in today’s market is a disciplined, dividend-focused stock selection strategy grounded in logic, data, and a healthy dose of skepticism.
While this dividend-focused approach is a valuable tool, it’s only one part of our broader financial planning strategy at EsqWealth. Our goal is to build personalized investment plans tailored to each client’s goals, timeline, risk tolerance, and income needs.
Identifying dividend-paying, undervalued companies can be a key component of many portfolios. This strategy isn’t about chasing the next ten-bagger or riding the wave of the latest Bitcoin surge. High-flying growth stocks and speculative startups are not part of this particular portfolio. We do apply a separate, quantitative approach to evaluate those kinds of opportunities—but that’s a different strategy altogether.
Here, our focus is on identifying established, blue-chip companies with long histories of stability and shareholder returns—businesses that may be temporarily out of favor due to short-term headlines, cyclical trends, or misunderstood fundamentals. These companies often present compelling value opportunities and tend to reward patient investors over time.
This strategy aligns with Warren Buffett’s value-investing philosophy, making it well-suited for those seeking steady income, inflation protection, and long-term equity growth—while avoiding the deceptive allure of “too-good-to-be-true” yield traps that often disappoint.
Step 1: Screen for Dividend Yield in the “Sweet Spot”
We start by screening for companies offering a dividend yield between 3% and 9%, with 3-6% being the sweet spot or our “Goldilocks zone” since it’s not too low and not too high.
Below 3% is too low for this strategy. We are not merely chasing yield—we’re looking for companies that are explicitly committed to returning capital to shareholders on a recurring basis. These businesses are typically mature, profitable, and focused on long-term value creation.
As explored in The Dividend Imperative by Daniel Peris, companies that consistently pay and grow their dividends tend to be:
- Disciplined capital allocators
- Conservative in managing balance sheets
- Transparent with financials
Dividend payments impose accountability and reflect management’s confidence in the business. A modest but reliable yield can signify strength and sustainability, making it especially valuable in a value investing context.
If a yield is too high (above 10%), it may signal a “dividend trap”—a company whose stock has fallen sharply due to poor fundamentals, often preceding a dividend cut.
One company that exemplifies this risk is NextEra Energy Partners (NEP), whose dividend yield surged above 35% before facing financial struggles. NEP had been a dividend growth superstar, increasing its payout consistently for nearly a decade.
The 35% yield was attractive to many investors. However, NEP’s stock price plummeted from over $60 in mid-2023 to under $16 in November 2024, reflecting the market’s uncertainty. Investors who chased the high yield may have been caught off guard as the stock struggled to recover.
NEP changed its name to XPLR Infrastructure, LP (XIFR) in early 2025, as part of a broader restructuring effort, including leadership changes and a renewed focus on infrastructure investments.
Dividend yields in the 4% to 9% range often strike a balance—rewarding shareholders generously while maintaining financial sustainability.
Step 2: Examine Dividend Payment History
We favor companies that have a proven track record of consistent or rising dividends, preferably for at least 10 years. A long history of dividend increases suggests both resilience and discipline—these are companies that have weathered multiple economic cycles and still managed to return capital to shareholders.
Dividend Kings are companies that have increased their dividends for at least 50 consecutive years—a rare achievement that showcases resilience through economic cycles. These companies tend to be in stable industries like consumer staples, healthcare, and utilities. Examples include Johnson & Johnson (JNJ), Procter & Gamble (PG), and Coca-Cola (KO).
Dividend Aristocrats, on the other hand, are members of the S&P 500 that have increased their dividends for at least 25 consecutive years. While not as exclusive as the Kings, they still demonstrate strong financial discipline and shareholder commitment. Aristocrats include McDonald’s (MCD), Walmart (WMT), and Exxon Mobil (XOM).
Step 3: Confirm Dividend Sustainability Using Cash Flow
Next, we examine Free Cash Flow (FCF) margin which represents the percentage of revenue remaining after covering capital expenditures and operating costs—essentially, the cash available for dividends, share buybacks, debt reduction, or reinvestment. This helps us understand whether a company has enough liquidity to support and grow its dividend over time.
An FCF margin above 15% is generally considered healthy, signaling a company’s ability to sustain dividend payments even in turbulent economic periods.
A strong FCF margin also enables strategic flexibility—whether to reduce debt, repurchase shares, or reinvest in the business. For example, Apple regularly reports FCF margins exceeding 20%, while Altria (MO) supports its high dividend payout through similarly strong cash flows from its core tobacco business. Altria’s current FCF is over 40%.
Step 4: Check the Balance Sheet for Debt Load
We also look at the Total Debt-to-Equity (D/E) ratio, a measure of a company’s financial leverage. It compares total liabilities to shareholder equity and tells us how reliant a business is on borrowing.
- A high D/E ratio (above 150%) may suggest that a company is using debt to prop up dividends or operations, increasing risk.
- A moderate or low D/E ratio (below 100%) is generally a sign of a strong balance sheet and lower default risk.
The formula: D/E Ratio = Total Liabilities / Shareholder Equity
This is not per share—it’s a total financial metric from the company’s balance sheet. For example, a D/E ratio of 75% means the company has $0.75 in debt for every $1 of equity. Companies like Microsoft (MSFT) or Johnson & Johnson (JNJ) often carry D/E ratios below 50%, reflecting disciplined financial management. In contrast, highly leveraged companies—such as some telecom or energy firms—may carry D/E ratios above 200%, raising concerns about debt sustainability.
Step 5: Look Ahead, Not Just Back
When evaluating a stock, it’s important to assess both current and forward Price-to-Earnings (P/E) ratios to understand market sentiment and earnings expectations.
- Current P/E Ratio: This is calculated by dividing the stock’s current price by its trailing 12-month earnings per share (EPS):
Current P/E = Stock Price/EPS (past 12 months)
- Forward P/E Ratio: Instead of looking backward, this metric uses estimated future earnings (typically for the next 12 months):
Forward P/E=Stock Price/Projected EPS (next 12 months)
A lower Forward P/E compared to the Current P/E suggests that analysts expect earnings to grow, which can support dividend increases and stock appreciation. Conversely, a higher Forward P/E may indicate slowing growth or concerns about future earnings.
- Example 1: Microsoft (MSFT) has a current P/E of ~36, while its forward P/E is ~31, signaling expected earnings growth.
- Example 2: Altria (MO) has a current P/E of ~10, with a slightly higher forward P/E of ~11—suggesting muted growth expectations.
Comparing forward P/E ratios to historical trends and industry peers helps investors determine if a stock is undervalued, fairly valued, or overpriced. A lower-than-average forward P/E might suggest an attractive entry point, while an excessively high forward P/E could signal overheated valuations.
Step 6: Growth Potential and Profitability Efficiency
The PEG ratio (Price/Earnings-to-Growth ratio) is a valuation metric that adjusts the P/E ratio by incorporating a company’s expected earnings growth. It helps investors assess whether a stock is fairly valued relative to its growth potential. The Forward PEG/ROE helps refine this analysis by factoring in both growth potential and profitability efficiency. This metric adjusts the classic PEG ratio by incorporating Return on Equity (ROE), offering a clearer picture of what investors are paying for each unit of efficient growth.
Forward PEG/ROE = Forward PE / (Earnings growth × ROE).
A Forward PEG/ROE below 1 may point to a company that’s growing intelligently and efficiently and trading at a reasonable valuation. This metric adds depth to traditional analysis—helping long-term investors identify businesses where value meets quality and capital is being put to productive use.
Step 7: Look for Price Declines (But Only the Right Kind)
We also examine which companies are down significantly from their 2, 10, and 20-year highs. A stock trading 20-30% or more below its recent highs might be undervalued, but this metric needs to be interpreted carefully:
- Falling prices can reflect opportunity if the market is overly pessimistic.
- But they can also reflect real trouble – no one wants to catch a falling knife.
One current opportunity might be Target (TGT). Its dividend yield recently reached approximately 4.8%—within our target range—and it has raised its dividend for 56 consecutive years, making it one of the longest-running dividend growers in the market. The stock now trades below its 2019 price, a rare occurrence for a large-cap retailer with consistent profitability and a long operating history. While it may still be navigating consumer headwinds, it represents a potential value play for further analysis.
Similarly, UnitedHealth Group (UNH), although not a high-yield dividend payer (~1.5%), is trading at a price that is over 50% lower than its 2-year high. The decline followed concerns around Medicare Advantage reimbursement rates and healthcare services utilization trends. Yet, UNH remains a market leader with strong earnings growth and a pristine balance sheet. For investors with a long-term lens, this may be a case of temporary market overreaction—making it a compelling turnaround candidate, even if it doesn’t currently meet our dividend-focused criteria.
What These 7 Steps Revealed
Applying the seven-step screening process led to a curated list of 10 stocks warranting further analysis. In addition to these quantitative filters, we also consider sector dynamics, leadership quality, and broader industry trends to assess each company’s potential.
To arrive at this list, we only considered companies paying dividend yields in the 3% to 9% range and who have a proven track record of increasing or maintaining their dividends for at least 10 years. We then applied the other filters in a more relaxed manner. While this list does not constitute stock recommendations, it serves as a starting framework for deeper evaluation. Here they are in alphabetical order:
Bristol-Myers Squibb (BMY) – 6 out of 7 filters met
Bristol-Myers is a major pharmaceutical company with a strong presence in oncology, cardiovascular, and immunology therapies.
Positives: Attractive valuation, strong FCF margin, and high dividend yield provide compelling fundamentals.
Risks: Elevated debt load may constrain flexibility, and growth metrics suggest the need for continued pipeline strength.
- Dividend Yield: 5.17%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 27.47%
- Debt-to-Equity Ratio: 313.44% (missed this filter)
- Forward P/E vs. Current P/E: 7.44 vs. 18.00
- Forward PEG/ROE: –0.01
- Price Decline from 2-Year High: –27.85%
Comerica Incorporated (CMA) – 6 out of 7 filters met
Comerica is a regional bank headquartered in Dallas, focused on commercial lending and wealth management.
Positives: Strong dividend, clean balance sheet, and significant price discount make CMA an intriguing value in the banking sector.
Risks: Regional banks face macro and credit cycle risks, especially during periods of rising defaults or rate volatility.
- Dividend Yield: 4.94%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 20.26%
- Debt-to-Equity Ratio: 107.44%
- Forward P/E vs. Current P/E: 10.6 vs. 10.9
- Forward PEG/ROE: Estimated at 20.63 (missed this filter)
- Price Decline from 2-Year High: –21.8%
Chevron Corporation (CVX) – 6 out of 7 filters met
Chevron is a global energy giant involved in oil and gas exploration, production, and refining.
Positives: Long history of dividend increases and moderate debt levels offer stability in a cyclical sector.
Risks: Commodity price swings and environmental policy shifts can impact earnings and future project returns.
- Dividend Yield: 4.98%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 7.26% (missed this filter)
- Debt-to-Equity Ratio: 19.44%
- Forward P/E vs. Current P/E: 15.9 vs. 15.7 (too close to call it a miss)
- Forward PEG/ROE: 0.09
- Price Decline from 2-Year High: 19.99% (too close to call it a miss)
KeyCorp (KEY) – 6 out of 7 filters met
KeyCorp is a regional banking group serving individuals and businesses across the U.S., with a focus on community and mid-market clients.
Positives: Very strong dividend yield and deep value pricing.
Risks: Like other regionals, vulnerable to economic cycles, rate sensitivity, and regulatory pressures.
- Dividend Yield: 5.16%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 2.45% (missed this filter)
- Debt-to-Equity Ratio: 81.18%
- Forward P/E vs. Current P/E: 10.27 vs. 22.82
- Forward PEG/ROE: -0.06
- Price Decline from 2-Year High: –20.66%
Merck & Co., Inc. (MRK) – 7 out of 7 filters met
Merck is one of the world’s largest pharmaceutical companies, with a focus on oncology, vaccines, and animal health.
Positives: Defensive cash flows, reasonable valuation, and attractive dividend profile for a pharma giant.
Risks: Patent cliffs and dependence on blockbuster drugs like Keytruda require continuous R&D innovation.
- Dividend Yield: 4.10%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 26.71%
- Debt-to-Equity Ratio: 82.63%
- Forward P/E vs. Current P/E: 8.43 vs. 11.40
- Forward PEG/ROE: 0.05
- Price Decline from 2-Year High: –41.86%
Prudential Financial (PRU) – 7 out of 7 filters met
Prudential is a leading global financial services company offering insurance, retirement, and investment management solutions.
Positives: Attractive dividend yield, solid free cash flow margin, and steep valuation discount make PRU appealing for income and value-oriented investors.
Risks: As an insurer, Prudential is highly sensitive to interest rate movements and underwriting performance, which may affect earnings stability.
- Dividend Yield: 5.20%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 22.17%
- Debt-to-Equity Ratio: 103.24%
- Forward P/E vs. Current P/E: 7.36 vs. 16.42
- Forward PEG/ROE: 0.10
- Price Decline from 2-Year High: –20.51%
Regions Financial Corporation (RF) – 7 out of 7 filters met
Regions is a well-capitalized regional bank with strong market presence in the Southeastern U.S., serving both retail and commercial clients.
Positives: Strong FCF margin, low leverage, and an attractive valuation point to a well-managed, shareholder-friendly regional bank.
Risks: Earnings could be pressured by regional economic slowdowns, credit cycle exposure, or deposit migration in a higher-rate environment.
- Dividend Yield: 4.70%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 26.17%
- Debt-to-Equity Ratio: 39.26%
- Forward P/E vs. Current P/E: 9.13 vs. 10.28
- Forward PEG/ROE: 0.14
- Price Decline from 2-Year High: –23.82%
Target Corporation (TGT) – 5 out of 7 filters met
Target is a nationwide retailer known for its customer loyalty, private label brands, and omnichannel strategy.
Positives: Long track record of dividend growth, strong brand, and significant price discount provide potential upside for patient investors.
Risks: Profitability faces pressure from tight retail margins, inventory volatility, and intensifying competition from e-commerce.
- Dividend Yield: 4.77%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 3.34% (missed this filter)
- Debt-to-Equity Ratio: 135.52%
- Forward P/E vs. Current P/E: 12.28 vs. 10.33 (missed this filter)
- Forward PEG/ROE: 0.15
- Price Decline from 2-Year High: –48.35%
Truist Financial Corporation (TFC) – 6 out of 7 filters met
Truist is a top-10 U.S. bank formed by the merger of BB&T and SunTrust, offering a wide range of banking, investment, and insurance services.
Positives: Strong yield, healthy FCF margin, and a discounted valuation make it compelling for income and recovery-minded investors.
Risks: Ongoing integration challenges from the merger and regional banking headwinds could affect earnings momentum and investor sentiment.
- Dividend Yield: 5.27%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 18.54%
- Debt-to-Equity Ratio: 102.80%
- Forward P/E vs. Current P/E: 9.60 vs. 11.65
- Forward PEG/ROE: –12.41(missed this filter)
- Price Decline from 2-Year High: –19.56%
T. Rowe Price Group (TROW) – 6 out of 7 filters met
T. Rowe Price is a premier active asset manager, known for strong investment performance and a clean balance sheet.
Positives: High dividend yield, impressive FCF margin, and low debt make TROW a standout in the asset management space.
Risks: The firm is facing long-term structural pressure from the shift toward passive investing and rising margin compression in the industry.
- Dividend Yield: 5.42%
- 10-Years of Dividend Increase or Maintain: Yes
- Free Cash Flow (FCF) Margin: 29.63%
- Debt-to-Equity Ratio: 3.27%
- Forward P/E vs. Current P/E: 11.27 vs. 10.64 (missed this filter)
- Forward PEG/ROE: .15
- Price Decline from 2-Year High: –29.35%
Conclusion
At EsqWealth, our mission is to empower clients with evidence-based financial decisions that support lasting prosperity. This dividend-focused stock screen is just one of many tools we use to uncover valuable opportunities.
Whether we’re evaluating income strategies, constructing tax-efficient portfolios, or safeguarding multigenerational wealth, we go beyond surface-level metrics to deliver insights that align with each client’s broader financial vision.
If you’re considering how this strategy might integrate with your long-term goals or simply want an objective review of your existing plan, we’re here to help.
Because wealth isn’t just numbers—it’s about building a legacy that endures.
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.
