You’ve probably heard about people getting paid a dividend for owning a stock before. Basically, stable companies tend to be dividend stocks. Stable companies tend to have stagnant or slow earnings growth, and consequently, they reward shareholders by paying out a dividend. If you’re looking to take advantage of dividend stocks, there are some key factors to keep in mind. Moreover, when you hold dividend stocks, you’re able to reinvest those dividend payments to purchase more shares of the stock. When you’re looking for dividend stocks, the dividend yield is widely used to see whether it’s worth it to invest in the company. That said, let’s take a look at the dividend yield and how to potentially find dividend stocks to trade or invest in.
Dividend Stocks – Dividend Yield Explained
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Getting back, if you’re just trying to find dividend stocks to trade, you’ll need to analyze the dividend yield. However, like any other indicator, you should not base your trades or investments solely on the dividend yield. You would want to look at the company’s cash on hand and its history of dividend payments.
Now, the dividend yield is calculated by dividing a company’s annual dividend by its stock price and multiplying that value by 100. Consequently, you would get the dividend yield.
For example, assume a stock pays an annual dividend of $2 per year and trades at $50. The stock has an annual dividend yield of 4%. One thing to keep in mind is the fact that the stock price changes and the dividend yield could fluctuate over time. Moreover, the company could raise or cut its dividend, which would also affect its dividend yield.
Dividends are great if you want to increase your total rate of return. For example, let’s say you buy a tech stock and it increase by 15% this year and also pays a 5% dividend yield. Therefore, your total return would be 20%, or 15% + 5%.
Focus on Other Factors When Looking for Dividend Stocks
Now, www.dividend.com is a great tool for finding dividend stocks. When you’re looking for dividend stocks, you need to focus on various factors. For example, you want to see whether the company has a history of raising its dividend payout. Companies that have increased their dividends for at least 25 consecutive years are known as Dividend Aristocrats. If you’re looking for dividend stocks to trade or invest in, Dividend Aristocrats could be a good starting point.
For example, Coca-Cola Co. (KO) is considered a dividend aristocrat.
The company has raised its dividend for 55 consecutive years and is more than likely to continue increasing its dividend. Again, this information could be easily found on dividend.com.
You’ll also want to analyze the company’s financials. If you look into the company’s financial statements, you need to see whether the company has a lot of cash on hand, or if it’s burning through cash. Moreover, you want to see whether the company is taking on too much debt.
Additionally, you want to analyze whether the company is paying too much of its earnings per share as dividends. For example, let’s say a company has earnings per share (EPS) of $5, but it pays out an annual dividend of $4. That means the company has a dividend payout ratio of 80%, or $4 divided by $5. In other words, the dividend payments may be unstable, unless the company could increase its earnings significantly or cuts its dividends.
Filtering for Dividend Stocks
Let’s assume you’re focused on investing or trading dividend stocks. You can filter for large-cap stocks with specific dividend filters. For example, let’s assume you want to find dividend stocks with a yield of over 3% and a dividend payout ratio of less than 20%.
If you go on Finviz, you could easily filter for this.
Now, one thing to worry about is whether a company could potentially cut its dividend. For example, General Electric (GE) was in financial trouble and its dividend was in jeopardy. There were clues surrounding this. The company was in weak financial condition. Moreover, its earnings were weak. Consequently, sometimes, dividend stocks could be great for day trades.
Here’s a look at GE’s chart.
If you were able to figure out that GE’s dividend was in jeopardy, you could have potentially bought put options or shorted the stock.
The Bottom Line
When you’re looking for dividend stocks, you need to analyze the dividend yield. However, the dividend yield is not the only ratio to look at. You’ll also need to look at the stock’s history of dividends. Does the stock have a history of raising dividends? Does the stock have a history of fluctuating dividend payments? Moreover, you need to analyze the dividend payout ratio. You should look for stocks that are not paying out too high of a percentage of its EPS in the form of dividend payments. If the dividend payout ratio is too high, it may be unlikely the company will continue raising its dividend payments.
Moreover, you should look to analyze the company’s financial position. If the company is burning through cash and taking on too much debt, you might want to stray away from the company. We already witnessed what happened with GE, and if you based your decision solely on its dividend yield, you would’ve been burned. That said, dividend stocks could offer value and increase returns, but you need to carefully analyze all the information out there before considering buying dividend stocks.