Value Stock-Picking, Week 1: How to Find Top Dividend Plays

Step 3. Analyze the fundamentals of all five stocks, making sure that the balance sheet is solid and that the company is operating in a healthy business cycle.

Also, check out the payout ratio and stock's PEG ratio. As you do this work, write your observations in the "Reason for Picking" boxes. You also don't want to be surprised by bad news, so stay up-to-date on each company. You can do this by searching for articles and videos on TheStreet.com.

Step 4. Review each stock's price history by looking at the chart over the past 10 years or from the time the company became public. Does the stock stay within a certain trading range or do you see the price increasing over time? If its price is increasing steadily, and its fundamentals are sound, you could have a winner based on its price increase alone.

Step 5. Review the stock's dividend history. Has the company increased its dividend over time? If so, that's another reason to buy the stock, for the prospect of increasing income.

Step 6. Monitor your Stockpickr dividend portfolio of five stocks for a few months, checking the price and dividend activity once every two weeks. You want to make sure that your reasons for buying stand the test of time. Remember, you're looking for a company that actually pays the dividend while the stock price is increasing.

With this dividend play strategy, you're not looking to score a quick hit. You want to buy and hold the stock for, hopefully, many years. Following a stock for a few months before buying is a way of making sure you're making the right call before pulling the "buy" trigger.

Next: Value Stock-Picking, Week 2: How to Pick Bargain Stocks

>To order reprints of this article, click here: Reprints