A stock dividend is the dividend payout that is made to the investors in form of additional shares instead of cash payouts. Most dividend stocks yield a higher percentage of return on average compared to treasury bonds and conventional bank savings annually from their payouts. However, dividend stocks payouts can change significantly at an impulse and in turn, changes your value of investments. Therefore, if you desire to invest in dividend stocks, you need to be very selective. Here are 8 key things to look for before you invest in dividend stocks:
1. Dividend Per Share
Dividend per share is the sum amount paid to investors for every outstanding ordinary share. It is the key measure of the dividend stocks declared and paid out by a company to its investors. You can readily find the amounts in the websites such as the NASDAQ, SEC (Securities and Exchange Commission), and news releases on most financial sites that offer stock analysis and information. Dividend per share equals the total dividends paid over the total shares outstanding. Calculate your potential dividend per share before you invest.
2. Annualized Dividend
The most appealing part of the dividend stock is that it offers investors a steady source of income. You need to find out the frequency of such payouts as some pay once a year, others once per month, and some quarterly or semi-annually. Do the math of how much it adds up to if all the portions are converted annually to avoid missing an opportunity on a stock that pays smaller amounts but does so frequently resulting in higher payouts than the annual ones that seem to pay a bigger amount once.
3. Special and Uneven Dividends
Some corporations can opt to give its shareholders a big one-time payout incentive. Others can significantly change the per share dividend payout after a while. Always look out for such uneven dividend payouts. You can also check whether the company you want to invest in has a track record of paying consistent or growing dividends to shareholders over 5-10 years. It is a good sign that the company is growing and the management is willing to share the returns with shareholders.
4. Dividend Yield
A dividend yield is a financial percentage that indicates how much a company pays out in dividends annually in proportion to its shares. Calculate the dividend yield percent before you invest. For example, if a $60 stock pays 60 cents in annual dividends, it means that it has a yield of 1 percent. But a $6 stock that pays 6 cents in annual dividends has a 1 percent yield as well. Use dividend yield as a way to benchmark the annual return on your initial investment through dividend payouts.
5. Dividend Payout Ratio is 50% or More
You need to consider the changes to the dividend payout over time. Look for mid large-cap company to invest in because it’s stable and isn’t seeking to grow relentlessly anymore, then the majority of the profits it makes would be returned to shareholders in terms of dividend payouts. So look for a company with a dividend payout ratio of at least 50% or more. If a company has a low payout ratio, it should snap danger. The only exception to this rule is a company that has a good reason to withhold payouts or a company that has devised an extra way to generate exceptional returns for its shareholders.
6. Underlying Health of the Stock
The dividend stock is prone to market risks and price volatility and thus you should consider the entire performance of the company. Do not be lured by just big dividend payouts, but also consider how sustainable their earnings are given their current and future activities. A company with weakening performance such as falling cash flow, revenue, profits, etc cannot give sustainable dividend payouts in the long run. The less revenue and profit it makes the fewer dividends it can afford to pay. Eventually, a company with dropping revenues and profits will result in a stock price fall because investors will realize that the company is no longer performing and probably back out.
7. Company has Low CAPEX
As a dividend stock investor, look for a company with low capital expenditure (CAPEX) because a company with a high CAPEX means that it has to recurrently reinvest its profits to maintain its business operations, leaving less to distribute as dividends. For example, airlines have very high CAPEX as they frequently maintain their aircrafts and upgrade them to newer models after some time. So look for a company that’s able to maintain/grow its business with minimal CAPEX.
8. Ex-Dividend Dates
Dividends are always declared with an ex-dividend date which is a deadline date that determines who gets dividend payout and who does not. It means that you have to be a shareholder around 3 weeks before the date of dividend payout in order to get your dividends.