If youre looking to generate income from your investments then buying good dividend paying stocks will help your achieve this. The reason why many investors fail at dividend trading is down to poor stock picking, most new investors look for high dividend yields paid more frequently and often neglect looking at the core fundamentals of the company. If you can strike a balance between high dividend yields and good company financials then you will be onto a winner.
How to Find Good Dividend Paying Stocks
Before you start investing in any dividend paying stocks its important that you understand what you are trading so you can remain invested over a longer period of time. Instead of just looking for the best yields you need to dig deeper and find out what the company actually does and whether it has a future. You should look to invest in companies that have a durable competitive advantage, this means that the stock has a strong brand name that requires little or no investment to keep sales continuing; it also means that the company does not need to engage in price competition because of the strong reputation and brand recognition.
Other Factors to Consider When Looking for Good Dividend Paying Stocks
There are five other factors that you should consider before you invest in a dividend paying stocks, these factors include PE Ratio, Return on Capital, Return of Equity, Debt and Stock Buy Back. If you can find a stock which has strong numbers in all these areas then the chances are that this company will rise in value and continue paying dividends for a very long time.
The price equity ratio is basically price of the stock divided by the earnings of the stock; it measures how much you would have to invest to get a $1 back in return. If a stock has a PE ratio of 60 this means that youll have to invest $60 to get $1 in return, such a company would be considered very expensive. If on the other hand a company has a PE ratio of 10 this means youll have to invest $10 to earn $1 in return, this stock would have good value.
Return of Equity and Capital
If the company has generated profits of $10 and has assets worth $100, and liabilities worth $50 then the return on equity would be $10/($100-$50) which is equivalent to 20%. The return on capital would be calculated as $10/$100 which would be 10%; what you are looking for is a stock which has consistently high return on equity and capital.
Its very important to look at debt when you invest in a company, you should try to find a stock which has little or no debt. If the company does have debt then you should look at the earnings to see how long it would take to clear the debt. If a company has $100 billion in debt and earns yearly profits of $2 billion then it would take 50 years to clear the long term debt. If another company has earnings of $33 billion a year then it would take 3 years to clear the debt, clearly the second company would be a much better investment.
Stock Buy Back
Another way to check the strength of a stock is to look at any buy-back programs the company has. If the stock continually buys back its stock it will become more valuable. You should check to see how much the company buys back over a period of ten years. Conversely you should be concerned when companies who continually issue shares as this makes your shares lose value.
Good Dividend Paying Stocks
Here is a list good dividend paying stocks that have excellent fundamentals.