Lots of people know how to make money from stock investment although knowing how to select stocks with a high-yielding dividend is another matter. Dividend stocks offer a great way of increasing your wealth and here we give you 4 essential tips to help you make the best selection:
1. A Look at the Past
Due to the fact that none of us have a crystal ball, it is impossible to determine how a stock will perform in the future. Analysts always take a close look at past performance to give an indication of how robust a company is. You want to identify the firms who have maintained strong dividend payments that have been consistently made on time. If companies show a fluctuating performance in the past, the stock is unlikely to yield a reliable dividend going forward.
2. Focus on Yield and Growth
When researching stocks, look at the yield in the first instance as it is the best way of narrowing down your search. It’s important to have a target yield level in mind and then you can research those stocks offering that yield and above.
Always check the historical growth of the stock’s dividend as again, this will give an idea of future performance. It may be yielding 4% now but if this is an anomalous spike, it won’t reflect the stock’s true value.
3. Check the Balance Sheet and Business Plan
A company’s balance sheet is a great place to check out its financial strength. You’ll be able to see the extent to which a company is leveraged which will then have an impact on its stock’s performance potential. Ideally, you want to identify the companies with minimal debt and plenty of assets.
The business plan is another place to carry out some investigation on the firm underlying the stocks you have shortlisted. Here you can find out what the company’s vision of the future is and whether there is a growth opportunity to be had.
As with all types of investing, you want to buy at the bottom and sell at the top and so new firms or newly merged firms with an aggressive expansion schedule generally offer the most attractive dividend-paying stocks.
4. A Relative Approach
Once you have a small list of stocks paying decent dividends, it is now time to consider buying. The first thing to do is look at the current yield compared with the firm’s historical yield performance. If historically the yield has been at 6% but is now offering 4%, the stock is trading at a premium and is probably not worth a second look. However, if the offered yield is 4% and it is towards the top end of its historical yield trends, it could well be a stock to get excited about.
It might also be a good idea to check out other stocks in the same sector as the ones you have highlighted. It’s useful to know where a company sits in relation to its competition and also how the sector itself has fared in recent months or years. You want to buy stocks in progressive companies that are offering goods, products or services that are in rising demand rather than those who are having a slump in performance.