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Dividend Hunting
I’ve been doing dividend investing for a few months now and I’ve picked up some really useful information on how to get the best yields from the dividend-paying stocks, so here it is!
Buy Great Stocks
Above all else, if you’re going to buy stocks that pay dividends, make sure that they will keep doing so in the future. There are a lot of indicators that can tell you whether or not you’re buying a life-long keeper or a flash in the pan. I received a lot of my information from a guide over at the Dividend Detective site, though I have some slightly different opinions about a few things. These are the eight factors I go by.
1. Buy Stocks with Respectable Yields
This should be a given, as accruing dividends from stocks with poor yields is an exercise in futility. I don’t buy anything that has a dividend lower than my savings account, though I will go close if they’re a proven yearly grower of their dividends above the inflation rate (which I’ll get to more later).
2. Buy Stocks with Low Debt
There’s a certain ratio to look for when buying stocks called the Leverage Ratio, and what that ratio will tell you is how strong a company is. It divides the total assets of the company from the shareholder equity invested in the company. A ratio below 5 is good, and a ratio below 2 is great.
3. Buy from the Main Indexes
If it’s not listed on NYSE, NASDAQ, or AMEX, forget about it. If it’s not a strong enough company to be listed by the big three, it’s not strong enough to grow your investment.
4. Nothing under $10 a share
Anything that’s less than $10 a share has been hammered down for some reason and should be avoided. I generally like shares between $10 and $40, though I have been buying some of the absolute strongest dividend stocks lately, and those are usually priced around $60.
5. Listen to the Analysts
I use the metrics on the MSN Investing page to check what the top stock raters are saying about the stock. While I don’t hold them in quite as high opinion as I do the financial reports provided by the respective company, they are a good general indicator of how the stock is viewed. They have three at the site to peruse – analyst ratings, StockScouter, and CAPS Community stock ratings. The first two are professional analysts and the last one is for investors to state their opinions about the quality of a stock. If all three are neutral to positive, it’s a good sign to go ahead and invest (or continue to invest) in a certain company.
6. Look for Companies that Grow Their Dividends
If a company doesn’t increase their dividends by some amount each year, they’re not going to be able to match the rate of inflation and become less valuable as the years pass. All of the strongest companies will at least increase their dividend above the rate of inflation each year. The 10-year average rate of inflation is around 2.5-2.6% a year as of late and some companies will consistently raise their dividends by over 5% a year, effectively beating and trouncing inflation. The stocks that do so are the ones to buy.
7. Look for Companies with Long-Term Growth
Companies that have a strong future ahead of them will continue to produce dividend payouts and growth over the years, so it’s good to pick companies that have a positive long-term outlook. A growth rate between 5-14% over the next five years is a great indicator on how the company is doing. Anything lower leads to stagnation and sub-inflation dividend growth rates; anything higher can lead to some great short-term gains, but has the potential to crash in the future.
8. Lower Dividend Payout Ratios Are Better
The Dividend Payout Ratio is the percentage of profits that the company is paying out to its investors. I’ve heard it said that a payout ratio below 80% is good, though most of the strongest dividend companies keep theirs below 60%. The only exception to this are REITs (Real Estate Investment Trusts), as they are trusts that are set up to specifically pay out 90% of their profits to their investors. REITs have the potential to be rather risky, but they can be a great source of dividends in the short-term.
Buy Low
Once you’ve whittled down your stock choices through using the eight factors above, make sure to buy when your stock choices are at lower prices, as you’ll get a better yield. As a dividend investor, your biggest concern is not the stock price, but how many shares you can get for your investment. I like to buy shares of stock in my portfolio when the Gain/Loss amount for a certain stock is in the negative, as it indicates that the stock is lower than it was when I originally bought it and I can get a better yield from purchasing shares at the current time.
Profit!
It may be a while before the above header happens to a substantial degree, but if you’ve invested well, you’ll be well on your way to having some (or a lot of) additional income!
Discuss this post at [The Forum of Jason Vincion]!
Posted on July 10th, 2010.
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