Dividend Stocks For Dummies book cover

Dividend Stocks For Dummies

By: Lawrence Carrel Published: 04-26-2010

Expert advice on a mature, reliable way to invest money

According to Fortune magazine, investing in dividends is one of the top five ways to survive market instability. Dividend Stocks For Dummies gives you the expert information and advice you need to successfully add dividends to your investment portfolio, revealing how to make the most out of dividend stock investing-no matter the type of market.

  • Explains the nuts and bolts of dividends, values, and returns
  • Shows you how to effectively research companies, gauge growth and return, and the best way to manage a dividend portfolio
  • Provides strategies for increasing dividend investments

Weather a down market-reach for Dividend Stocks for Dummies!

Articles From Dividend Stocks For Dummies

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66 results
66 results
Dividend Stocks For Dummies Cheat Sheet

Cheat Sheet / Updated 02-28-2022

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.

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How to Read a Company’s Balance Sheet

Article / Updated 06-30-2021

A balance sheet presents a financial snapshot of what the company owns and owes at a single point in time, typically at the end of each quarter. It’s essentially a net worth statement for a company. The left or top side of the balance sheet lists everything the company owns: its assets, also known as debits. The right or lower side lists the claims against the company, called liabilities or credits, and shareholder equity. Liabilities may not seem like credits to you, but that’s not a typo. In accounting lingo, a credit is a loan. A credit brings cash in that the firm can use to purchase an asset. However, this credit is a liability, a debt that must be paid back at a later date. We use assets and liabilities as our main terms, so don’t worry too much about keeping the debits and credits straight. It’s called a balance sheet because each side must equal the other. Assets equal liabilities plus shareholder equity. In other words, whatever assets aren’t being used to pay off the liabilities belong to the shareholders. See “Shareholder equity” below for more information. Assets Assets are items of value that the company owns. The major components that make up the asset side of the balance sheet include current assets, fixed assets, investments, and intangibles. Current assets include cash and cash equivalents (bank accounts, marketable securities), accounts receivables and inventory. Other assets include investments, like stocks and bonds, and fixed assets, like real estate and vehicles. Copyrights, trademarks, licenses, patents and the company’s goodwill (standing in the community) count as assets, too, and they’re called intangibles. Liabilities Liabilities are sort of like IOUs — together, they represent the total cash value of what the company owes to other entities. Liabilities aren’t necessarily a bad thing. After all, companies have to spend money to make money. They only become a problem when a company is consistently spending more than it’s earning and has no clear and viable strategy to reduce that trend. Liabilities include current liabilities, like accounts payable, and long-term debt, like mortgages. Anything the company owes falls under liabilities. Shareholder equity Subtract total liabilities from total assets, and you end up with the company’s net worth, also known as shareholder equity — the shareholders’ ownership stake after all the debts are paid. (That’s why stocks are also called equities.) Common stock, preferred stock, and retained earnings comprise the three major parts of shareholder equity. They ultimately determine how much each share receives in dividends.

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Performing Your Due Diligence when Investing in Dividend Stocks

Article / Updated 03-26-2016

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.

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Six Signs of a Promising Dividend Stock Company

Article / Updated 03-26-2016

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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Investing in the Top Sectors for Dividend Stocks

Article / Updated 03-26-2016

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)

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Researching Your Dividend Stock Picks with Important Formulas

Article / Updated 03-26-2016

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 Yield 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

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Buying and Selling Dividend Stocks through a Full-Service Broker

Article / Updated 03-26-2016

A full-service broker does everything a discount broker does and then some. She can help you develop an investment strategy that’s suitable for your situation and goals, suggest particular stocks, issue the necessary buy and sell orders on your behalf, and help you make the necessary adjustments to your portfolio as your situation and goals change. Typically, you develop a personal relationship with one stockbroker and/or financial advisor at a brokerage house. Having an expert around to watch your back and call your attention to potentially incredible investment opportunities may sound like an ideal arrangement, but before you take the plunge, consider the following pros and cons of hiring a full-service broker. Advantages of hiring a full-service broker A trained, skilled, and experienced full-service broker who’s committed to serving your best interests can save you loads of time, energy, and worry while potentially boosting your portfolio’s earnings more than enough to cover his fees and commissions. A great broker eats, sleeps, and breathes Wall Street. His job is to research companies, keep his finger on the pulse of the stock market, and earn his clients money — something you may not have the time, skill, or interest to do yourself. Depending on your broker and the relationship you develop, you may receive some additional perks. A good full-service broker examines your financial situation and helps you develop a custom plan. Such a plan is likely to go beyond investing in the stock market and may include developing a budget or savings plan, obtaining sufficient life insurance, offering tax-saving strategies, and planning your estate. Regardless of whether you fly solo or hire an expert, stay on top of your finances. No one cares as much about your money and how fast it grows as you do. That’s because no one else depends on it for their retirement or other goals. Disadvantages of hiring a full-service broker Enlisting the assistance of an expert always comes with a price tag. In the case of a full-service broker, that price tag may represent a combination of commissions and fees called transaction costs and may come in much higher than it would at a discount brokerage. In addition, a good full-service broker may be reluctant to work with investors with small nest eggs and screen them out by requiring higher minimum investments. This bias isn’t automatically a bad thing as long as you have the money, but if you don’t, it may prevent you from gaining access to some of the most qualified full-service brokers. Whether you go full-service or discount, focus on keeping costs down. Your total return, or net profit, is determined after portfolio costs. If your portfolio earned a profit of $600 one year, but it took $700 worth of expenses to build and maintain it, you actually end up with a $100 loss. So although you can’t control how big of a profit you earn, you have complete control over the expenses you pay. When dealing with full-service brokers, be aware of the possibility of conflicts of interest. If the broker is more concerned with padding her pockets than optimizing your portfolio, she may sell you investment products that are more profitable for her or her investment firm than for you. Brokers have also been known to engage in a shady activity called churning, in which they encourage clients to buy and sell more often than necessary so the brokerage can earn a commission with each transaction. Always ask your advisor the rationale behind each recommendation. If the advisor can’t explain why a particular investment is a good one or you don’t like the reason, don’t buy the investment. Also keep tabs on the turnover rate of stocks in your portfolio. If your broker is constantly buying and selling (and raking in commissions with each transaction), express your concern and put a stop to it if all the activity isn’t clearly in your best interest.

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How to Calculate the Payout Ratio of a Given Stock

Article / Updated 03-26-2016

Simply put, the payout ratio tells you how much of the company’s profits come back to you as a dividend. You become an investor for the profits, and a dividend investor specifically because you want to pocket some of those profits now. The payout ratio shows you exactly how much of those profits actually land in your pocket. To calculate the payout ratio, divide the company’s dividends per share by the earnings per share (both can be found on the company’s income statement): Payout Ratio = Dividends per Share / Earnings per Share Use the following general guidelines to help measure how well various companies’ payout ratios stack up: Low: Anything much lower than 50 percent is cause for investigating further. Don’t automatically shun companies with low payout ratios, because they do have room to grow the size of the dividend. Many growth companies have low payout ratios because they continue to reinvest in the business; these companies offer potential for increased dividend payments as well as capital appreciation in stock price. For example, regional banks often pay out between 30 and 50 percent of their profits. But if a company with a low payout ratio isn’t growing fast, you know management can pay out more but chooses not to. Traditional: 50 percent is the traditional payout ratio, meaning the company is paying 50 percent of its profits to the shareholders in the form of dividends. Standard: 50 to 70 percent is an average range and should not generate any concern. Remember that the range may vary for some industries. Utilities, for example, sometimes pay as high as 80 percent, which is okay for that industry. High: A higher payout ratio is always better because it means more money in your pocket. However, you don’t want to see a payout ratio of 100 percent or higher. A 100 percent payout ratio means nothing is left to invest in the business. A dividend payout that exceeds the quarterly profit is a big cause for alarm and usually indicates an inevitable dividend cut. Also, a high payout ratio leaves little room for error. If most of the earnings are paid out as dividends, a big drop in earnings one quarter may lead to the company taking on debt to make the payments or an immediate dividend cut. Either way, it’s a bad sign. If a company keeps increasing its dividend, but the payout ratio remains below 50 percent, that’s a clear sign of strong earnings growth. Procter & Gamble has raised its dividend payment for nearly 60 years while paying out between 40 and 50 percent of its quarterly earnings.

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How to Evaluate a Corporation Using Stock Ratios

Article / Updated 03-26-2016

Return on equity (ROE), quick ratio, debt covering ratio, debt-to-equity ratio and price-to-book ratio (PBR) are all ratios that can be calculated to provide clues about a company’s finances. Evaluate management with the return on equity ROE measures the return on your investment in the company by showing how well the company invested its investors’ money and the company’s accumulated profits. To calculate ROE, divide net annual profit by total equity: ROE = Net Annual Profit / Average Annual Shareholder Equity To determine net annual profit, total the company’s net profits presented in each of its four most recent quarterly income statements. To determine equity, average the shareholder equity for those same four quarters; you can find that info on the balance sheets for the most recent quarters. After you discover the company’s ROE, compare it to others in the same sector. The company with the higher ROE is the more profitable one; try to find companies with an ROE of more than 10 percent. A terrible ROE (say, 0 percent) means the company is mismanaged. When valuing a stock, ask yourself whether the ROE beat the rate of return the company could have earned just by putting the money into Treasury bonds. Look for companies that post an ROE greater than 10. After you’ve found that, go to the Yahoo! Finance Industry Browser to see whether the company’s ROE exceeds others in its sector and if so, how many. You want to buy companies with high ROEs that have seen an upward trend over the past five years. Sneaking a peek at the quick ratio One of the best indicators of a company’s ability to pay dividends moving forward is the quick ratio, which looks to see whether a company has enough liquid assets to cover dividends. Because inventories are the least liquid portion of current assets, the quick ratio removes them from the equation. To derive the quick ratio, subtract inventories from current assets; this removal leaves you with the firm’s most liquid assets. Then divide the result by current liabilities. Quick Ratio = (Current Assets – Inventories) / Current Liabilities If you want to get extremely conservative, move beyond the quick ratio and just look at the cash on hand. Pure cash provides the best measure of whether a dividend can be paid because the current assets in the quick ratio may include a lot of accounts receivables from customers who can’t pay or aren’t required to pay their bills in the time frame that dividends are scheduled to be paid. Covering the debt covering ratio Debt Covering Ratio = Operating Income / Current Liabilities The debt covering ratio should equal at least 2. A debt covering ratio below that means the company may not be generating enough to pay both its interest payments and dividends. Valuing the debt-to-equity ratio An additional ratio to check for the stability of the company in general and the dividend in particular is the debt-to-equity ratio, which shows how much debt a company has compared to its equity. A high debt-to-equity ratio shows that the company relies on debt rather than equity to finance its operations and presents a clear warning sign. The equation for the debt-to-equity ratio is: Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity You can find these numbers on a company’s balance sheet. Working with price-to-book ratio Book value = Tangible Assets – Liabilities To calculate PBR, divide the company’s market value or market capitalization (share price times number of shares outstanding) by its book value: Price-to-Book Ratio (PBR) = Market Value / Book Value Book value can be misleading because the assets category on the balance sheet reflects the company’s cost to acquire an asset, not necessarily the asset’s current market value. The greater percentage of total assets made up by current assets, the more accurate book value becomes.

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How to Choose a Utility Company Stock for Investment

Article / Updated 03-26-2016

How can you know which utilities are good investments? Following is a list of characteristics to examine when evaluating a utility company for your dividend portfolio: Dividend performance: In most cases, you don’t realize big returns from share price appreciation, so make sure the utility has been increasing its dividend payouts regularly over the last four to five years. Don’t worry about cuts that happened at least five years ago if dividends have been growing since then, but make sure you understand the reasons for them. Were they due to poor investments, excessive debt, or poor relations with regulators? Recent cutbacks in dividends are enough to knock them out of a portfolio. If it’s a small cut, you may want to stay, but for a lot of investors a dividend cut is a deal breaker. Who knows when it will come back? If it doesn’t, you’re left with a stock with low expectations for share price appreciation. Sell these shares and put the cash into a firm with a growing dividend. A focused business: Utilities with nonutility businesses are riskier than pure utilities. These outside operations have the potential to divert capital away from dividends, hurting yields. When you look at the company’s earnings press release or annual report, look for income and investment details broken out by separate units of the corporation. These units may be subsidiaries or company units involved in completely different businesses. As a dividend investor, stick with pure utilities. Regulatory environment: Some states have tighter regulations than others, and others, such as Texas, are more pro-business. States with laissez-faire attitudes about keeping rates affordable for customers tend to allow utilities to charge higher rates — bad for consumers, but good for shareholders. Florida, Texas, and California are utility-investor-friendly states. Do some research on the Internet to find out which other states fall into this category. Just go to a search engine and type in the type of utility (such as “electric”), the name of the state, and the words “regulatory atmosphere.” The results should bring up the kind of information you need. Although it often gets a negative rap, deregulation isn’t necessarily bad. Because deregulation hasn’t had its intended effects, utilities in a position to take advantage and charge more when supply is short post higher profits. This action may sound shady to customers, but it’s good for shareholders. Debt load: Utilities often carry large amounts of debt because they own significant infrastructure that requires a lot of upkeep and upgrading. Typically, their liabilities are larger than their assets, but debt higher than 60 percent of total capital should be a red flag. These high debt loads make utilities extremely sensitive to fluctuations in interest rates — as interest rates rise and fall, so do the debt payments. Therefore, utilities perform best when interest rates are falling or remain low. Very high yields: Be wary of utilities with yields significantly higher than the sector average. High yields mean the company may be shelling out more than 80 percent of its profits, or the stock has been pushed very low. A low stock price may just be due to a broad bear market, but it may point to fundamental problems in the business. In addition, high dividend payouts may cause regulators to get tougher on the company and lower its rates, which can lead to a dividend cut.

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