Picking a dividend stock does not equate to simply identifying the stocks with the highest dividend yields and making an investment. High dividends often equate to high risk because the cause and whether it can be sustained is unknown. The investor should consider the dividend payment amongst other factors when adding a dividend stock to the portfolio.
First, identify the stocks that pay dividends by a using free stock screener such as the one offered by MSN Money or a similar tool available through an online brokerage account. Input key variables like dividend yield percentage, price/earnings ratio figure, earnings per share growth rate, and debt to equity ratio. Hit calculate and the system will generate a list of dividend stocks that meet the criteria.
Review these results, being wary of companies with dividends over seven percent. Further research of these is recommended to find out why the dividend is so high. Review the other stocks on the list and determine whether diversification or saturation within an industry sector is the goal. Pick the desired stocks based on this decision and then study the earnings projections and balance sheets of these companies.
Read one year’s worth of press releases for each company, identifying major events. Conduct online research to identify any bad publicity provided by Wall Street. Investigate these situations further to gain a full picture of what happened. The situation may not be as bad as it was portrayed or it may instead be much worse.
See what analysts are saying about each stock on the short list. Analyst opinions can cause a large fluctuation in the price of a share so select stocks that have favorable outlooks. Lastly, review the dividend payment history to see if the dividend has consistently risen during the last five to ten years. This will show whether the company is steadily growing, a sign that it is healthy.