Monday, May 07, 2007

Alan Brochstein on Dividend Stocks

Alan Brochstein (via SeekingAlpha which for me was via The Kirk Report!) wrote an interesting piece on dividend paying stocks. Below is an excerpt which highlights some of the key points to look for when shopping for a dividend paying stock:

High yields aren’t necessarily the best yields. If the investor starts with the present dividend yield, it is essential to understand where it is coming from and where it is headed. First, the investor should examine the balance sheet – is it laden with debt? Is that debt due soon? Are there other problems, like excess inventory or accumulating receivables? Next, the investor should examine the “payout ratio”, which is essentially the dividend divided by the earnings. If the company is paying out today more than it is making, then the likelihood of continuing to receive that dividend might be low. If it paying out very little, then there is room to grow. Finally, one should have an understanding of the value of the stock, which will obviously relate to the other two issues discussed. After all, the return on the investment is not only the dividends that the investor receives over time, but also the difference between the purchase and sale prices.