I LOVE dividends.

What beats sitting back, collecting payments – from businesses who’re serving customers every day? Dividends can have a huge impact on an investor’s returns. Just look at  the FTSE-100, for example.

In 20 years – from 2000 to 2020 – this popular index of UK shares barely moved.

However, with dividends included, the FTSE-100 returned 122%.

Almost all of the gains came from the dividends.

And this income potentially helped shield investors during market declines.

Of course, nothing is guaranteed.

Investors must choose the right dividend shares in quality companies.

So before buying any income stock, we believe it’s important to check:

1. Is the dividend yield high enough?

Yield is the expected annual income relative to the current share price.

For example, a £10 stock paying a £0.50 annual dividend has a 5% dividend yield. Finding this number is easy.

Type any stock into Google to see its dividend yield at a glance.

In general, we suggest looking for stocks paying a 2-6% dividend yield.

Anything smaller could mean better options are elsewhere.

Anything larger might be a red flag – which brings me to the second check:

2. Is the dividend sustainable?

Dividends are never guaranteed. And there’s no point collecting a huge dividend if it’s more likely to eventually get cut.

That’s why it’s crucial to check the company’s ‘Payout Ratio.’

Divide the company’s dividend by its earnings per share.

This reveals the percentage of net earnings paid out as dividends.

The right payout ratio depends on the company and its industry.

However, 30-75% is a good general range.

3. Is the dividend consistent?

Better still, is it GROWING?

Some income stocks have monster track records – paying dividends for 30, 40 and even 50+ straight years. Although past performance does not guarantee future performance, nor does past dividend guarantee future dividends, I see it as a positive sign to consider.

Others (often called ‘Dividend Aristocrats’) have even increased the dividend every year.

Sometimes for decades without fail.

ANY company can cut its dividend.

However, it’s arguably less likely with those who’ve built a long track-record. If they did cut the dividend, it would potentially have a bigger impact on the company’s market value.