This is the second installment of Money Q&A’s first ever blog series, Killer Stock Characteristics.
Be Sure To Check Out The Previous Killer Stock Characteristics
Today, we’ll look at how dividend yield can help point you in the right direction when looking for a stock to purchase.
I love stocks that give dividends to investors. I often prefer to buy stocks that offer a dividend yield as opposed to regular stock. Of course, choosing dividend payers is a personal preference, but dividend paying companies typically make great investments.
Reasons To Consider Dividend Paying Stocks
Dividend Payers Are Profitable. Most companies only issue dividends when they are earning a profit. In fact, if a company is issuing a dividend without a profit, you should run and not walk to the exit. Profitable companies issue dividends and even more profitable ones increase their dividends over time.
Dividend Payers Are Older And Wiser. Dividend paying companies are typically safer and more established than other companies that do not issue dividends. It typically takes companies years to issue its first dividend. Just look at Apple Computers for example. It took them decades to issue one to investors.
Dividend Stocks Pay You To Wait. Dividend paying stocks pay investors to wait for the company’s stock price to increase. Even if they are good shares in good companies but their share prices have stalled, you can still earn money while waiting on the company’s stock price to rebound.
Companies That Offer A Dividend Are Few. If you are finding it difficult to find great companies to invest in, choosing a dividend payer may be a great place to start simply because it will narrow your choices considerably.
What Is Dividend Yield?
Dividend yield is a measure of the amount of cash flow you will receive from your investment. Dividend yield is typically measured as a percentage of your total investment. To give you an example of how to calculate dividend yield, let’s say that your stock investment pays annual dividends of $1 per share and you bought it for $20 per share. That means that your stock’s dividend yield is 5% ($1 / $20).
One of the bad things though about the share price of your stock going up is that your dividend yield will drop. This is typically because the company’s dividend that it issues will not change as much as its share price might. If the stock price doubles to $40 per share, your dividend yield will drop to 2.5% ($1 / $40). The dividend itself hasn’t changed, but the share price and dividend yield sure have.
Too Much Dividend Yield May Be Bad Too
This very same dividend yield problem can have a similar and negative aspect if the share price drops too much. You should not simply look for a stock with the highest yield. If a share price drops like a rock but the company still issues its same dividend, the yield will rise incredibly. This can be a serious red flag to investors. A share price that dropped to $10 per share but still issues $1 annual dividend will result in a 10% dividend yield. So, a juicy dividend yield does not always indicate a great stock. Be sure to find out why the yield is so great.
Why Look For Stocks With Good Dividend Yield
Dividends provide compounding interest if you reinvest your dividends back into new shares of stock. When you get a dividend and immediately have the company or your stock brokerage firm reinvests it for you, you purchase additional shares of the stock. Then, you will receive even more dividends during the next quarter when the next round of dividends is issued. And, like compounding interest on your bank account, your dividends will earn their own dividends compounding over and over.
Be sure to check out the next edition of the Money Q&A Blog Series, Killer Stock Characteristics, where I’ll talk about dividend growth and other consistency.
Don’t Miss The Other Killer Stock Characteristics In The Series
As always, I’d love to hear your thoughts, comments, questions, or suggestions. Please feel free to shoot me an email Hank [at] MoneyQandA.com.