Just because a stock is yielding an above market dividend rate, it may not mean that this stock is a screaming buy. And by above market yield I mean around 3%. I wrote about how to analyze a stock based upon its financial information here, but there are other considerations to make when investing in dividend stocks as well. If you are looking for a great dividend stock to invest in, there are thousands of stocks to choose from. Here are three warning signs for dividend investors to look out for.
1. If the stock has an inconsistent track record for dividends. You want to see a consistent payout of dividends. If a company does particularly poorly in one of the quarters, and cannot pay its dividends, this is an inadvertent signal of unstability and poor management. A growing dividend year over year is also a great sign that the company is committed to giving great returns to its shareholders. Also stability and in the fact that the company’s financials can pay out a dividend (and increase it) over time. This would point to a sustainable competitive in the company’s product and/or operations. Also a signal that the company is well managed.
2. Low dividend cover. If a stock has a high dividend and the dividend coverage is high then it might be a risky purchase. This is because the dividend is not well covered by profits.
This payout ratio also shows how well the earnings of a company support the dividend payments it is giving out. The lower the ratio, the more the company is retaining its earnings and secure the dividend payments are, while the higher the ratio the more the earnings are payout out to the investors in the form of dividends.
3. High Yield. While having high yielding dividends overtime is not a bad thing, purchasing a high yielding dividend stock from the start may signal that there is something inadvertently risky about the stock. With an average market yield around 3%, anything past 6% means that there something going on with the stock, perhaps the company stock went down a significant amount. Another reason can include that the company is having a hard time in growing their business and instead of retaining its earnings, the company has elected to pay it out to its investors.
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