Investing in companies that pay dividends can be a smart move, especially if you plan to hold onto their stocks for a long time. Dividend yield is a measure that tells you what percentage of the stock's price you get back in dividends.
When you combine dividends with any increase in the stock's price, you get both current income and potential future growth. If you don't need the income, you can even reinvest the dividends.
Many investors look for stocks with high dividend yields as a guide. However, there can be issues when relying solely on dividend yield. It's important to understand what dividend yield can and cannot tell you.
Looking at a stock's dividend yield helps you understand the return you're getting from that investment. For instance, if a stock is priced at $25 and the company pays an annual dividend of $1.50, the dividend yield is 6% (calculated by dividing $1.50 by $25).
To find companies with high dividend yields, you can use a stock-screening service like Finviz or do the calculations yourself. Finviz's stock screener helps you filter companies based on their dividend yields. Once you pick a company, you'll be directed to its page, where you can check out its candlestick chart, earnings, and other important information.
Finviz conveniently displays a stock's annual dividend yield on the stock summary page, making it simple for investors and traders. For example, you might see a company's annual dividend listed at $.96 and the annual dividend yield at 3.02%. You can calculate the current dividend yield using the stock's latest closing price.
While this approach helps you find companies with high dividend yields, it's crucial to keep in mind that making investment decisions based on just one metric is not recommended.
Dividend yield can be tricky, so you need to be cautious. The bottom part of the dividend yield formula is the stock's price per share. If the price drops, and the dividends stay the same, the dividend yield goes up.
For example, if PFC's stock price falls to $25.03 per share, its dividend yield would be 3.84%. While this might seem like good news for a shareholder, it could also signal that the company is prioritizing shareholders over funding its operations and growth.
Remember, if you're using a stock's current or recent closing prices to assess dividend yields, it might not always indicate a problem because stock prices change a lot for various reasons.
You can compare daily prices and monthly averages to spot any trends. Combine this information with fundamental analysis to better understand what might be happening with the stock.
Looking at a stock using fundamental analysis helps investors get a complete picture of a company's financial performance, how easily it can meet short-term obligations, and its overall financial health.
Liquidity tells us how fast a company can turn its stuff into money, while solvency checks if a company can handle its debts.
Dividends are paid from money the company earns. You should check if the company has a good amount of earnings and a history of steady growth.
If a company recently took on a big debt, you should find out if it has enough money and assets to handle its debts before you invest. It also needs money to pay dividends, run its business, and invest in itself.
That's where other important ratios come in. Things like working capital, the quick ratio, and the debt-to-equity ratio are some of the key ratios to look at when evaluating a company.
