This assignment was written by Stockpickr member Ira Krakow.
A great way to give your portfolio a boost is to look for stockspaying high
Value Stock-Picking: How to Find TopDividend Plays"). Yes, with a good dividend-paying stock, youcan get the
double reward of dividend income andstock price growth.
In addition, a dividend sets a "floor" on thestock price. So if the stock price goes down, then the
dividend yield goes up. This attractsinvestors looking for income. When that happens, with more buyers,the stock price goes up.
Why You Need to Look Beyond a High Dividend
It's not enough to just pick the highest dividend-payer from astock
screen. If you do onlythat, you risk investing in a company that might not really be able topay that high dividend, which could lead to a double whammy: thedividend could be cut, or eliminated entirely, and the stock price cango south as well.
Before you buy a high dividend-paying stock, you need to look atthe company's financials to determine whether there's enough cash tocover the dividend payment -- now and in the future. To help yougauge the health of a company's dividends, there are a few ratios youcan check out.
First, look at the company's
payoutratio, the percentage of
earnings that the company pays as adividend. A payout ratio of 70% or less generally means the dividendis safe. If the payout ratio is greater than 100%, that's a warningsignal. For example,
( CZN), which has adividend yield of 9.3%, also has a 256% payout ratio. Why so high?Perhaps it's using debt or selling
assets to pay the dividend. You need toresearch the company and find out.
Next, check out the
debt-to-equity ratio and thecurrent ratio, which are measures of the level of assets relative to
If a company iscarrying a lot of debt relative to its assets, that should set off analarm bell. As with the payout ratio, a debt-to-equity ratio orcurrent ratio over 100% could mean that the dividend might not besustainable, and a rate of 70% or less is considered a safe level.
Reviewing these ratios will help you avoid being seduced byimpossibly high yields. Take
, an oil tankercarrier with a yield of 16.6%. Is this astronomical dividendsustainable?
Its payout ratio of 109% and current ratio of 179%should give pause before clicking the buy button. On the other hand,perhaps the oil tanker business is so profitable that the company cancontinue to pay the rich dividend. Again, when you see ratios likethis, you need to dig a little deeper to find what's going on.
Keep an Eye On the Flip Side
On the other end of the dividend spectrum, when a company cuts itsdividend, it's often a sign of trouble, as with
,a furniture manufacturer hit hard by the housing slump, or
, a troubled mortgage lender, which eliminated itsdividend entirely.
Your Dividend Stock-Picking Assignment
Your assignment is to find dividend stocks with healthydividend-related ratios.
Stockpickr, create aportfolio called "High Dividend Stocks:
Your Stockpickr Username."(To create a portfolio on Stockpickr, you'll need to first log-in. Ifyou're currently not a Stockpickr member, you can register at
Select five dividend stocks from Stockpickr orTheStreet.com, by searching for the keywords "dividend" or"dividends."
To help you get started, check out:
HighYield Warren Buffett Stocks and
TopDividend Stocks You've Never Heard Of on Stockpickr, and"
The Top Dividend Stocks of the Week"on TheStreet.com.
For each stock, go to Yahoo! Finance and note the stock's payoutratio, current ratio, and debt/equity ratio. At the end of thetrading day, record the closing price in the "Reason?" box onStockpickr.
Here's how to find the dividend-related ratios on Yahoo! Finance:
1. On the specific stock quote page, click the "Key Statistics"link on the left hand side of the screen.
2. On the Key Statistics page, look for the "Dividends and Splits"section. That's where you'll find the payout ratio.
3. On the Key Statistics page, look for the "Balance Sheet"section. That's where you'll find the current ratio and totaldebt/equity ratio.
Check back after two weeks, one month, six weeks,and three months to see how the company's price has held up andwhether or not the company is still paying the dividend. If you'reserious about picking solid dividend stocks, consider monitoring thehealth of each company's dividends for about three months.
Even in this challenging market environment, by doing
fundamental analysis on highdividend paying stocks, you may be able to earn a better rate ofreturn than a certificate of deposit (CD) or money market.
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