Analyzing dividend stocks

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Analyzing dividend stocks

Post  Max on Thu Oct 21, 2010 12:05 am

The dividend yield (annual dividend / current price) will provide some natural protection against price declines, since as the stock price falls (assuming the dividend stays the same), the yield rises. When compared to a GIC or other low interest investments, a nice safe reliable bank stock that pays a consistent dividend can look very attractive when the price gets beaten up. Especially considering that dividends are taxed at roughly half the rate of interest income, dividends generally rise over time, and the stock price can also rise with it.

Eg. A $30 stock with a $1 dividend doesnt look so great (3.3%), but if that stock price falls to $15 then the yield grows to 6.7% and it starts to look pretty good. If you have an average market return in mind and think about it like a GIC where investors would be crazy not to invest at that yield, then you can calculate the price where the stock should bottom out and take advantage of that if the stock should ever reach that price.

The flipside of this, is that dividend investors view dividend stocks as an income stream and nothing more. Once the stock price has risen, and the dividend yield falls, you should think about moving on.

Consider yield and dividend payout ratio to get a more balanced view of the stock. Whatever is paid out as a dividend is not available to the company to reinvest in the business, so unless the company has no need for the money, the dividend is actually hurting the growth rate of the company. The dividend payout ratio will help you to gauge whether the dividend yield is sustainable.

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