Dividends are a way for a company to reward its shareholders for investing in a company. In this economy, many investors are looking toward dividend paying stocks to provide a sense of security. Before investing in a dividend paying stock, it is important to understand what dividends are, and how they work. Although a stock with a high yield of 11% might sound like a good investment, if you are not careful and do your homework before you buy, you might find that instead of getting 11% and stock appreciation, you are left with no dividend and stock depreciation.
The most critical thing to consider when researching a dividend stock to potentially invest in, is the company's ability to pay its dividend. A danger sign is when the firm's payout ratio (the percent of a company's earnings that is being allocated towards paying the dividend) is approaching lofty levels and is "eating up" nearly all of the earnings for the quarter. The payout ratio is not something you are going to find in your local newspaper, you are going to have to dig some, and get the information either online or at the library. I like to use Value Line investment survey if I don't have internet access or S&P's rating service either online or in paper form. The cutoff point for determining a safe ratio is up to you, but I get concerned when it approaches more than 50%.
Dividends have several dates which are important to remember, the ex dividend date, the record date and the payout date. The most important of these three dates to consider, is the ex dividend date. This is the date that determines who receives and who doesn't receive the dividends for that period. What the ex dividend date means exactly is, that on that date, the day before is the last day for a shareholder to qualify for a dividend. On that day, the stock is trading, without offering the dividend to the shareholders. For example if a stock is going ex dividend on March 11th, March 10th is going to be the last day that you could own the stock and still get the dividend for that period. The record date is simply when the company looks back at the last time the stock went ex dividend and sees who owned the stock on the date preceding it. The company then prepares to pay those shareholders a dividend. The payout date is actually when the company pays its shareholders of record the dividend.
Dividend yield is simply the annual dividend of the stock, divided by the stock price. For example if a stock is paying $5 a year in dividends and the stock's price is $100 we divided 5.00 by 100 and get 5%. Although high yielding stocks sound like good investments you have to be careful, due to the relationship between yield and stock price. If a stock's price is falling and it is still paying the same amount in dividends this will cause the yield to increase. But you have to ask yourself "why is the stock price declining"? It could be a sign that the company is in trouble and is in danger of either cutting the dividend, or eliminating it entirely. When I first started investing I was tempted to look for high yielding stocks but I soon learned, if the stock is really a high yielding stock, it could be in trouble and you soon might find yourself with no dividend at all.
stock promoters
