Dividend stocks are attractive because they can be a steady stream of income. However, you should exercise caution before buying dividend stocks. Anytime you buy a dividend stock, you want to make sure the stock satisfies the five following checks. I’ll soon tell you why.
- It pays high dividend
- The dividend is paid consistently over long periods of time
- Dividend has grown over the years
- Dividend comes from its earnings and not debt
- Chances of dividend continuing for the long term are very high
High Dividend Yield
If you are going to invest in a stock solely for dividends, you want to ensure the stock gives you high dividends. The number you want to look at is not the amount of dollars it gives you per quarter, but rather the percentage yield you are receiving.
Long term consistency
Past behavior is usually a good determinant of future behavior. If you are investing in a dividend stock, you want to ensure the company has long storied history of paying solid dividends on a consistent basis.
Dividend has grown over the years
Although this is not a requirement, it would be nice to have a stock whose dividend has grown over the years. It means more money in your pocket. You definitely don’t want to invest in a company who has cut dividends over the years. That would just mean the company has problems. However, do your homework and read the company’s annual statements. Sometimes a company might scale back the dividend just so it has more cash to become stronger and grow even further.
Source of Dividends
Knowing the source of dividends is extremely important. You want to make sure your dividends come from the company’s earnings, not its debt. Often times when a company slashes its dividends, the stock loses value. So the company starts incurring debt to keep up its dividend payments and in-turn keep the shareholders happy. This is the wrong approach to paying dividends. Dividends are company earnings that the company isn’t reinvesting to grow itself. If the dividends do not come from company’s earnings, you want to stay away from investing in that company, no matter how lucrative the dividend seems.
Long term continuity
If you are investing in the stock purely for dividend reasons, you want to ensure the company has the ability to continue paying its dividend over the long term. It only makes sense. Otherwise, why invest in a company you know soon falter on its dividend payments, correct?
As a rule of thumb, it’s always best to do your own homework before you invest in anything. Education is the best mitigation against risk. Before you invest in a stock, learn as much as you can about the company. It will only help make your decision better and stronger.