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✓ The Wall Street Journal
✓ Financial Times
✓ This book!
Many stock listings include both a dividend column and a dividend yield column. If the company hasn’t paid a dividend, you see something like 0.00 or a hyphen (-). Some listings show only the previous and current share price and the single-day and year-to-date gain or loss. In that case, you need to dig deeper to find out whether the company pays dividends and the amount of the most recent payment. With most online stock listings, you simply click the ticker symbol for more information about the company.
Exploring sectors where dividend stocks hang out
Companies in certain industries, such as utilities and telecoms, are more likely to pay dividends than companies in other industries, including technology and biotech. The biggest reason for this tendency is that some industries have larger, more established companies, compared with industries that have a higher concentration of smaller, growth-oriented companies.
As you begin investing in dividend stocks, you may want to focus your efforts on the following sectors:
✓ Utilities: Electricity, water, and natural gas (suppliers, not producers)
✓ Energy: Oil, natural gas (producers, not suppliers), and Master Limited Partnerships (MLPs)
✓ Telecoms: Carriers (U.S. and international) and wireless
✓ Consumer staples: Food/beverages, prescription drugs, household products, tobacco, and alcohol
Crunching the numbers
Eeny, meeny, miny, moe is no way to pick dividend stocks. Savvy investors carefully inspect the company reports – balance sheet, income statement, and cash flow statement – and crunch the numbers to evaluate the company’s performance, at least on paper. As you prepare to evaluate a company, research the following figures or calculate them yourself by using numbers from the company’s quarterly report. (Chapter 9 shows you how.)
✓ Current dividend per share (DPS): The quarterly cash payment each investor receives for each share of company stock he or she owns.
✓ Indicated dividend: The projected annual dividend for the next year, assuming the company pays the same dividend per share for each quarter of the next year.
✓ Dividend yield: A ratio that compares the amount the company pays out in dividends per share to its share price. You use yields to gauge a dividend’s rate of return. Yields move inversely to share price – that is, yields go up when share prices go down (and vice versa).
✓ Earnings per share (EPS): The portion of a company’s profit allocated to each share of stock. If XYZ Company sold 2 million shares of stock and earned a profit of $1 million, it earned 50 cents per share, or $1 million/2 million shares = $0.50. A company that earns $1 per share is twice as profitable as the one that earned 50 cents a share.
✓ Price-to-earnings ratio (P/E): The ratio of the share price to the annual earnings per share, which tells you how many dollars you need to invest to receive a dollar of the company’s profits.
✓ Payout ratio: The percentage of a company’s net profit it pays to shareholders in the form of dividends. The payout ratio indicates whether the company is sharing more of its profits with investors or reinvesting it in the company.
✓ Net margin: The ratio of net profits to net revenues, indicating the percentage of each dollar of sales that translates into a profit. High net margins typically indicate that a company has little competition and large demand for its products. This situation allows the company to charge a high price for its products or services.
✓ Return on equity (ROE): The ratio of a company’s annual net profit to shareholder equity, ROE provides some indication of how effective a company is turning investor dollars into profits.
✓ Quick ratio: An indication of a company’s liquidity or ability to meet its short-term financial obligations. The higher the ratio, the more likely it can afford to pay dividends moving forward.
✓ Debt covering ratio: An indication of whether a company has sufficient operating income to cover its current liabilities, including payments on debt.
✓ Cash flow: The difference in how much actual cash comes into the company during the quarter versus how much it pays out. A company can make a lot of sales in a quarter, but if clients don’t pay their bills, no cash comes into the firm.
Performing additional research and analysis
Numbers paint a fairly detailed portrait of a company’s current financial status and can even be used to some degree to forecast the company’s future performance. Numbers, however, provide no context. They may indicate potential problems or opportunities, but they don’t reveal what’s causing those problems or making those opportunities available. They provide little indication of the company’s management philosophy or expertise; or outside factors, such as the state of the economy, what’s going on in the sector, and what analysts and investors think of the company’s prospects.
To find out everything you need to know to make a wise decision, you have to do some research. Here are some suggestions to find out more information about the companies you’re thinking of investing in:
✓ Read the quarterly earnings reports of the companies you’re thinking of investing in. Every public company is legally obligated to file these reports with the U.S. Securities and Exchange Commission (SEC) – the federal regulator of Wall Street.
✓ Research companies on the Internet. You can usually find plenty of information on the company’s website, in online financial publications, and on sites such as Yahoo! Finance and Google Finance. Use your favorite search engine to search for the company by name.
✓ Check out the competition online, too. Which company is leading the pack; what’s it doing that the others aren’t?
✓ Read reports written by stock analysts at investment banks. These analysts spend a lot of time each quarter investigating whether companies are performing up to their own expectations.
✓ Subscribe to and read financial publications online or off. Sorry, but not everything is available for free on the Internet – you usually have to pay for the best information, whether you get it online or in print.
✓ Check out what other investors have to say. Many investors maintain blogs that provide useful insights and can give you some sense of investor sentiment.
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