Every quarter, companies report their earnings. And every quarter new investors ask what to look for in earnings reports from dividend stocks.

Most companies follow a calendar quarter, so I will be digging through a flood of third-quarter earnings reports over the next four weeks. While I review hundreds of company earnings reports, I focus on a few specific items. I also look for opportunities to use Wall Street’s earnings game against them.

My investment recommendations focus on stocks and other investments that pay dividends. A stable to growing income stream provides a solid base for a successful long-term investment portfolio. With a dividend-paying stock, I focus on a few items from the quarterly earnings report. Typically, I can dig out this information in 15 to 20 minutes. However, keep in mind that I need to be time-efficient: I review hundreds of earnings reports each quarter. Here are the main items I check in a company’s quarterly earnings report:

• Free cash flow per share for the quarter. Because I want to continue to earn dividends, I check to make sure the company generates enough cash to pay its dividend—and hopefully grow it over time. For many companies with high dividend yields, free cash flow will not be the same as GAAP earnings per share. I may need to pull some extra numbers out of the income statement.
• Free cash flow trend. A declining cash flow per share is the most significant danger signal for income-focused investing. I want to see stable to growing cash flow per share. If cash flow is falling, I’ll dig deeper into the company operations to determine if this truly is a trend or can be explained by a short-term change in the business operations.
• Managements comments about dividends. In 2020, many companies slashed dividend payments due to the effects of the pandemic on their business operations. I want to learn how management and boards of directors feel about paying and growing dividends in the future. Some companies are very focused on returning cash to investors. Others spend more time trying to make the Wall Street analysts happy.

Along with the earnings release, most companies will host an earnings conference call, during which management discusses company results and prospects and then takes questions from the Wall Street crowd. The calls typically last an hour; often I’ll scan through the transcripts to save time. But there are a few I listen to every time, primarily because when the CEOs talk, I get smarter. Two favorites are Barry Sternlicht of Starwood Property Trust (STWD) and Michael Nierenberg of New Residential Investment (NRZ).

Shifting gears, if you listen to the financial news, you will hear whether individual companies “beat” or “missed” their quarterly earnings. These discussions revolve around whether the company’s quarterly reported earnings per share were above or below the consensus Wall Street analyst forecasts. For long-term investors, a beat or miss means nothing. However, if a stock you like ends up with a “miss” and the share price drops because of the perceived business shortfall, trust your long-term focused analysis and pick up some shares.