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Six Signs of a Promising Dividend Stock Company

Part of the Dividend Stocks For Dummies Cheat Sheet

Dividend stock companies often give you signs that their outlooks are promising. Although you shouldn’t bank entirely on a stock’s promise, these signs can help you weed out bad-news dividend stocks that don’t belong in your investment portfolio.

  • Rising dividend payments: A long history of rising dividend payments, in good times and bad, generally indicates a stable company. Look for at least a three-year history; five years is better.

  • Fiscal strength: You want to see debt ratios showing that the company has sufficient financial resources to cover liabilities, as well as continued dividend payments at or near levels of past payments. Look for the following:

    • Quick Ratio higher than 1 percent.

    • Debt Ratio higher than 2 percent.

    • Debt-to-equity ratio at or below 1 percent.

  • Good value: Shares trading below absolute or fair value. Go to Yahoo! Finance and compare the company’s P/E with the P/E for its sector. A below-average P/E may be a bargain. Also compare growth rates and look for companies growing faster than the industry.

  • Predictable, sustainable cash flow: Banks, consumer staples, and utilities have a solid reputation for maintaining positive cash flow. Avoid industries and individual companies that have a track record of erratic cash flow streams.

  • Confident company insiders: If company insiders are buying rather than selling shares, that means they believe in the stock’s strength.

  • Sector survival: Consider companies that seem to be holding their own or even thriving in a sector that’s bruised and battered.

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