Dividend Stocks For Dummies
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Dividend stock investing may seem daunting, but with a little knowledge of how to find and pick promising dividend-paying stocks, you can invest in these stocks and reap dividends like a pro. Your portfolio will thank you.

Researching your dividend stock picks with important formulas

As with all stocks, you should research the dividend stocks you’re considering before you buy them to ensure they’re good investments. These formulas help you determine whether a stock’s dividend and other markers are sufficient to meet your needs. Check out the company’s balance sheet, income statement, and cash flow statements for the figures you need to crunch the numbers using the following formulas.

Dividend Per Share (DPS)

Total Dividends ÷ Total Shares = Dividend Per Share (for the quarter)

$_______________ ÷ _______________ shares = $_______________ DPS

Indicated Dividend Per Share (IDS)

Dividend Per Share (DPS) x 4 = Indicated Dividend Per Share

$_______________ x 4 = $_______________ IDS


Indicated Dividend Per Share ÷ Share Price = Yield

$_______________ ÷ $_______________ = _______________ % Yield

Earnings Per Share (EPS)

Net Profit ÷ Total Shares Outstanding = Earnings Per Share

$_______________ ÷ _______________ shares = $_______________ EPS

Price-to-Earnings (P/E) Ratio

Share price ÷ Annual Earnings Per Share = P/E

$_______________ ÷ $_______________ = _______________ P/E

Payout ratio

Dividends Per Share ÷ Earnings Per Share = Payout Ratio

$_______________ ÷ $_______________ = _______________% Payout Ratio

Net Margin

Net Profit ÷ Total Revenues = Net Margin

$_______________ ÷ $_______________ = _______________% Net Margin

Return On Equity (ROE)

Net Annual Profit ÷ Average Annual Shareholder Equity = Return On Equity

$_______________ ÷ $_______________ = _______________% ROE

Quick Ratio

(Current Assets – Inventories) ÷ Current Liabilities = Quick Ratio

($______________- $______________ ) ÷ $______________ = ______________ Quick Ratio

Debt Covering Ratio

Operating Income ÷ Current Liabilities = Debt Covering Ratio

$_______________ ÷ $_______________ = _______________ Debt Covering Ratio

Debt-to-Equity Ratio

Total Liabilities ÷ Shareholders’ Equity = Debt-to-Equity Ratio

$_______________ ÷ $_______________ = _______________% Debt-to-Equity Ratio

Free Cash Flow

Net Cash from Operating Activities – Capital Expenditures = Free Cash Flow

$_______________ – $_______________ = $_______________ Free Cash Flow

Six signs of a promising dividend stock company

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.

Investing in the top sectors for dividend stocks

Several industrial sectors are filled with dividend-paying companies, and some sectors provide better bets than others for your dividend stock investment portfolio. The following sectors offer the top options for dividend stock investing; when you’re fishing for good dividend stocks, you can improve your chances of hooking some keepers by dropping your line in these holes:

  • Utilities: Electricity, water, and natural gas (suppliers, not producers)

  • Energy: Oil, natural gas (producers, not suppliers), and master limited partnerships (MLPs)

  • Telecommunications: Carriers (U.S. and international) and wireless services

  • Consumer staples: Food/beverages, prescription drugs, household products, tobacco, and alcohol

  • Real estate: Commercial, residential, or office buildings inside real estate investment trusts (REITS)

Performing your due diligence when investing in dividend stocks

Before investing in any dividend stock, you must perform due diligence to ensure it’s a suitable stock for your dividend investing needs. The following checklist helps you ask the right due diligence questions to sift through your stock possibilities:

  • Examine the company’s most recent quarterly statements, including the balance sheet, income statement, and cash flow statement.

    • Look at the income statement to make sure the company is profitable and whether profits are growing.

    • Refer to the balance sheet and income statement to calculate the Quick Ratio and Debt Ratio to determine the company’s fiscal strength.

    • Check out the cash flow statement to ensure the company has sufficient cash to cover liabilities and the dividend without a problem.

  • Crunch the numbers to examine the company’s fundamentals. Financial statements and Web sites can give you dividend per share, indicated dividend per share, yield, and earnings per share. From these figures, you can determine the price-to-earnings ratio, payout ratio, net margin, and return on equity.

  • Explore the company’s Web site and the Web sites of its major competitors to find out more about the industry and the individual companies.

  • Investigate the company on Yahoo! Finance or Google Finance for news articles and key statistics.

  • Read reports written by stock analysts at investment banks to determine whether the company is performing up to expectations.

  • Research financial publications online or off.

About This Article

This article is from the book:

About the book author:

Lawrence Carrel is a financial journalist and served as a staff writer at TheWallStreetJournal.com, SmartMoney.com, and TheStreet.com. He is the author of ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing (Wiley).

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