📊 How to Find Quality Stocks: The Dividend Scorecard

An easy framework for deciding what dividend stocks to buy, adapted for the Romanian emerging stock market.

Not all dividend stocks are created equal

A high yield might attract attention, but it's often a warning sign rather than an opportunity. A long history of payments doesn't guarantee future dividends. And strong financials today don't always translate into reliable income tomorrow.

So how do you identify dividend stocks you can trust with your retirement?

How do you know what to buy?

As you might know, I'm building a dividend portfolio that will hopefully replace my salary in the next 10-15 years (preferably 10 🤞🏻). To find the right stocks, I developed a scoring system that focuses on fundamentals and helps me identify companies capable of providing reliable, growing income.

Since I'm already researching these companies for my own portfolio, I thought of sharing my analysis with you. Plus, every Monday, I'll review one Romanian dividend stock, from blue chips to smaller but promising companies. The systematic scoring makes it easier to compare stocks and decide which ones deserve a place in our portfolios.

Now, there are plenty of books, frameworks, systems, apps out there that do a similar thing, but I haven’t found one that works “out of the box” for Romanian stocks, or any emerging markets for that matter.

For Romanian investors, investing in local stocks is a natural choice - it's our home market, we understand the business environment, we use or buy their products and services. But why might international investors be interested? Maybe for:

• Higher yields: Romanian blue chips often pay 7-10% yields vs 2-4% or less for US dividend aristocrats.

• Growth potential: As an emerging market, many Romanian companies are in earlier growth stages.

• Market inefficiencies: Less analyst coverage means more opportunities for finding undervalued gems.

• Tax considerations: 10% dividend tax for Romanian residents, with various rates for international investors depending on tax treaties.

• Special dividends: Some Romanian companies distribute extra profits through regular special dividends.

Of course, these advantages come with their own risks - which is why we need a structured framework for evaluation.

By the way, this framework answers us what to buy. For guidance on when to buy these stocks, I'll cover technical analysis in an upcoming post.

The Framework

Remember my previous post, 10+1 Questions I Ask Before Buying Any Dividend Stock? Those questions were just the start. I've turned them into something more structured - a scoring system that helps me evaluate every aspect of a dividend stock.

The framework looks at three main things:

• Business Fundamentals (15 points): Can this business keep making money?

• Dividend Quality (25 points): Can I trust these dividend payments?

• Risk Management (10 points): - What could go wrong?

Total: 50 points

The total score isn't just about whether to buy - it tells me how much I can trust a stock:

What Makes a Quality Romanian Dividend Stock?

The criteria below are calibrated specifically for Romanian stocks. Our market has its own characteristics - what's considered a large cap here would be a small cap in the US, and what looks like an unsustainable yield in developed markets is often normal and healthy here.

You can adapt these criteria for other markets, but below is what I've found makes sense for Romanian dividend stocks:

A. Business Fundamentals (15 points)

1. Market Capitalisation (5★)

Market cap shows staying power. While €200M barely qualifies as small-cap in the US, it represents a market leader in Romania.

• ★★★★★ - Above 1B RON (€200M) - Market leaders

• ★★★★☆ - 500M-1B RON (€100-200M) - Established players

• ★★★☆☆ - 100-500M RON (€20-100M) - Mid-sized companies

• ★★☆☆☆ - 50-100M RON (€10-20M) - Small but viable

• ★☆☆☆☆ - Below 50M RON (Under €10M) - Micro-caps

2. Business Understanding (5★)

Simple businesses are safer investments. In a market with less analyst coverage, understanding what you own becomes even more important.

• ★★★★★ - Crystal clear business model

• ★★★★☆ - Strong grasp of operations

• ★★★☆☆ - Basic understanding

• ★★☆☆☆ - Somewhat confusing

• ★☆☆☆☆ - Can't explain their business

3. Financial Health (5★)

Healthy finances protect dividends during tough times. Romanian companies often face more volatile business cycles, making financial health critical.

• ★★★★★ - Exceptional financials

• ★★★★☆ - Strong balance sheet

• ★★★☆☆ - Stable finances

• ★★☆☆☆ - Some weak spots

• ★☆☆☆☆ - Concerning metrics

B. Dividend Quality (25 points)

4. Dividend Status (5★)

Basically, I ask whether the company is paying dividends or not.

• ★★★★★ - Long payment track record

• ★★★★☆ - Consistent recent payments

• ★★★☆☆ - New dividend program

• ★★☆☆☆ - Announced but not started

• ★☆☆☆☆ - No dividends or policy

5. Payment History (5★)

While US dividend aristocrats boast 25+ years of payments, our market only reopened in 1995. Ten years of consistency here demonstrates similar commitment.

• ★★★★★ - Over 10 years

• ★★★★☆ - 5-10 years

• ★★★☆☆ - 3-5 years

• ★★☆☆☆ - 1-2 years

• ★☆☆☆☆ - Under 1 year

6. Yield Range (5★)

Romanian blue chips consistently pay 7-10% yields while maintaining conservative payout ratios. What looks dangerous in the US is often sustainable here.

• ★★★★★ - 7-10% (Sweet spot)

• ★★★★☆ - 5-7% (Solid)

• ★★★☆☆ - 3-5% or 10-12% (Caution)

• ★★☆☆☆ - 2-3% or 12-15% (Warning)

• ★☆☆☆☆ - Below 2% or above 15% (Danger)

7. Payout Ratio (5★)

Even with higher yields, Romanian companies need to retain earnings for growth.

• ★★★★★ - Below 50% of profits

• ★★★★☆ - 50-70%

• ★★★☆☆ - 70-90%

• ★★☆☆☆ - 90-100%

• ★☆☆☆☆ - Above 100%

8. Dividend Growth (5★)

With higher inflation historically, dividend growth becomes critical for maintaining real income.

• ★★★★★ - 0%+ annual growth

• ★★★★☆ - 5-10% growth

• ★★★☆☆ - Matches inflation

• ★★☆☆☆ - Flat payments

• ★☆☆☆☆ - Shrinking dividends

C. Risk Management (10 points)

9. Payment Consistency (5★)

We exclude the 2008-2010 period when many solid companies had to conserve cash. Recent reliability matters most.

• ★★★★★ - Perfect record (except 2008-2010)

• ★★★★☆ - One missed payment

• ★★★☆☆ - Recent gap (2020+)

• ★★☆☆☆ - Multiple explained gaps

• ★☆☆☆☆ - Several unexplained gaps

10. Trading Volume (Liquidity) (5★)

Liquidity is generally lower than in developed markets. Being able to exit when needed matters more with higher yields.

• ★★★★★ - Heavy daily trading

• ★★★★☆ - Easy to trade €20k

• ★★★☆☆ - Regular small trades

• ★★☆☆☆ - Thin daily volume

• ★☆☆☆☆ - Weekly trading only

Position Sizing Based on Scores

Now that we have a framework to help us evaluate dividend stocks, the next step is deciding how much to invest in each one. Quality should drive position size - the better the score, the more confidence you can have in the investment.

🟢 Elite Tier: 45-50 points

These stocks form your portfolio's foundation. They combine solid market positions with sustainable, growing dividends. Think of blue chips that have rewarded shareholders through multiple market cycles. While their yields might not be the highest, their reliability justifies larger allocations.

• Up to 10% of your portfolio

• Buy more during market dips

• Perfect for dividend reinvestment

• Check quarterly

🔵 Strong Buy: 40-44 points

Strong performers that just miss elite status. Often these are established companies with one minor imperfection - perhaps slightly lower market cap or shorter dividend history. They still deserve significant portfolio allocations.

• 3-5% positions

• Watch for buying chances

• Review every quarter

• Average down strategically

⚪️ Worth Watching: 35-39 points

Good companies with specific issues to monitor. Maybe the payout ratio is creeping up, or trading volume isn't ideal. The fundamentals are sound, but some caution is warranted. Start small and increase your position only if the company addresses these concerns.

• Start at 1-2%

• Grow position if issues resolve

• Set clear targets

• Keep total under 20%

• Quarterly check-ins

🟡 Needs Work: 30-34 points

These stocks have potential but face significant challenges. The dividend might look attractive, but risks are substantial. Consider them only for small, speculative positions within your income portfolio.

• Maximum 1% positions

• Need clear improvement catalyst

• Tight stop losses

• Monthly monitoring

• Clear exit plan

🔴 Pass: Below 30 points

Multiple red flags mean avoiding these stocks, regardless of their yield. The risks outweigh any potential income. Your dividend portfolio needs reliable payers, not speculative bets.

• Skip these entirely

• Watch for major improvements

• Trading only, no investing

Next Week: First Stock Analysis, Banca Transilvania (TLV)

If you’re curious to see this framework in action, check in every week to see how I score stocks trading on BVB, the Romanian stock exchange.

I'll start with Banca Transilvania (TLV), Romania's second-largest listed company by market cap. Join me next Monday to discover how it scores on quality and dividend reliability.

Lady Magee

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