Can anyone point me towards some information on investing in dividend stocks, and how to identify good companies? Are there any metrics? I am fairly illiterate when it comes to finance and stocks, but I do have a portfolio composed of mainly growth stocks. I'd like to re-invest some of the earnings I've realized into "safer" areas - like dividend stocks and/or ETFs.
If you don't have a good knowledge of finance, maybe you should not put too much money in individual stocks. But if you really want to invest, you can just compare the rate of return of the most known stocks available to you (like the one from the S&P for the US).
The rate of return is very simple to compute, it's
For example a company with a current share price of 50.12 USD that delivered a dividend of 1.26 USD last year would have a rate of return of 100 * 1.26/50.12= 2.51%
Now if you only invest in the most known stocks, since they are already covered by nearly all financial institutions and analysts:
- You can easily find information about them, and if there are facing troubles, you will hear about it.
- You can easily find past and expected dividends (if there are past dividentds, but no expected dividends, be careful...).
- The riskier companies usually have a higher rate of return: higher risk means less investor, which means lower stock prices and more pressure from shareholder to get higher dividends.
- The less risky companies usually have a lower rate of return: they get more investors because they pay stable dividends, hence they have an expensive share price (relative to the dividend).
If you are looking for lower risk dividend companies, take a sample of companies and invest those with the lowest rates of return (but avoid extreme values). Of course since the stock prices are changing all the time, you have to compare them with a price taken at the same time (like the closing price of a specific day) and for the dividend, they can be on several basis (yearly, quartely, etc..) so you have to be sure to take the same basis.
You can also find the P/E ratio which is the opposite indicator (= share price/dividend) so an higher P/E ratio means a lower risk.
Most of the time you can find the P/E ratio or the rate of return already computed on specialized website or brokers.
How to find good divided stocks? Research and read. Google, Yahoo, and most likely your broker offer some sort of stock screener tool where you can look for stocks with given P/E ratios, dividend payouts, pricing, and any of a number of other filters. When you've found some that appeal to you, read what others are saying on stock talk websites like Vantagewire and Stockhouse. Read what each company is putting out as news and look at their quarterly reports. In Canada you can find a company's reports for free on Sedar. I'm afraid I don't know the U.S. equivalent. Reuters will be of help.
Finding a good dividend-paying stock is the same as finding a good growth or value stock; research the company and the sector as if you were buying it to take the company over.
How do you find good quality dividend stocks? That is an easy one. Past performance has always been my key to this answer. also remember why you are investing in the first place. Do you want cash flow, security or capital growth. Also let's not forget... how much time do you want to devote to this venture. There is going to be a balance in your investing and your returns. More time in... the higher returns you get.
As for finding good dividend stocks, look to the Dividend Aristocrats or the Dividend Contenders. These companies have consistently increased their payouts to their investors for years. There is a trading strategy that could escalate your returns. Dividend Capturing, simply put... You buy the stock before the ex-date and sell after date of record. Thus collecting a dividend and moving on to the next one. Warning: though this is a profitable strategy, it only works with certain stocks so do your research or find a good source.