Welcome back to our Dividend Series, where we explore the world of dividend stocks. Selecting the right dividend stocks can be a fundamental strategy for income-focused investors. As we have already discussed different types of dividend stocks. So, before you begin your journey in this investment domain, it’s important to understand what factors to consider. Let’s delve into the essential aspects to explore before buying dividend stocks.
1. Company Health: The Foundation of Dividends
One of the primary things to assess is the company’s overall financial health. A company in solid financial shape is better positioned to maintain consistent dividend payments. Look at financial statements, earnings reports, and credit ratings to gauge the company’s stability.
2. Dividend Yield: Unlocking Income Potential
The dividend yield is the annual income generated from your investment, typically expressed as a percentage of the stock’s price. This yield is annualized because dividends are typically paid periodically, such as quarterly. If a stock pays a quarterly dividend, you multiply that amount by four to calculate the annual yield. While a high yield may seem attractive, this could lead to a “Yield Trap”. So, it’s important to strike a balance between income and risk. Exceptionally high yields can be a red flag, potentially indicating financial distress. Consider your income needs and risk tolerance when evaluating a stock’s yield.
Here are a few high dividend-yield stocks:
3. Payout Ratio: Ensuring Sustainability
The payout ratio reveals the proportion of a company’s earnings allocated to paying dividends. A lower payout ratio suggests that a company has more room to grow its dividend or invest in its operations. A higher payout ratio might indicate potential vulnerability to economic downturns and that the company is stretching its financial resources. Analyzing this ratio helps gauge the sustainability of dividend payments. While we don’t recommend any specific number, anything beyond 60% for Non-legally obligated companies is not a sustainable payout ratio.
Here are a few stocks with payout ratios less than or equal to 50% :