Some of the biggest names in the Fortune 500 list such as Dow Chemical, Pfizer and GE cut their dividend payouts this year. To give you an idea, the market has seen about a $48 billion cut in dividend payouts. Does this mean that consumers should start panicking? We think not. Historically it has been noticed that companies which have paid dividend through market down turns have returned on average about 9% plus in comparison to the 6.8 percent of the S&P 500. The question that remains about buying stocks is how do you find high yield dividend stock and how do you identify them. Listed below are few features you may want to look out for.
Identifying Dividend Yielding Stock
When it comes down identifying high yield stock it may be beneficial to look at, what is known as the “Coverage” ratio. This is calculated by taking the earnings per share dividend and dividing it by the dividend per share. Usually with regard to the coverage ratio, a figure higher than two is considered good. A lot of fund manager and industry analysts swear by this philosophy. In addition to this is the usual judging of a stock by taking into consideration its dividend yield to it’s share price. When calculating this take the dividends paid by the share over the last 12 months and divide it by the current share price.
Yield Stock Bargains In The Market
A lot of investors often ask the question can dividend yield stocks be used to identify a stock market bargain, and the answer is an unequivocated “YES”. Let us put his in perspective, assume that a share has a total paid dividend of $2 in the last 12 months and it’s current price is $80, therefore the yield is 2/80 or 2.5%. However if the price rises to $82 the yield will fall to 2/82 or 2.43%. Of course the opposite will happen if the price falls. Come to think of the reason why dividend yield stocks can help you identify a bargain is owing to the simple reason that the yield is usually high if the price of the share is low. This reflect the outlook of management who feel that they do not need to alter their payout policy as their outlook to the future is positive.
High Yield Stocks & Dogs Of The Dow
This theory was popularized by Michael O’Higgins in the year 1991, represents a theory that the highest yielding stocks in the Dow are representative of the best bargains available in the market. This is owing to the above stated facts that the management of these companies feel that they are in a good position and do not need to alter their dividend payouts as their outlooks remain positive. In regards to “Dogs of the Dow”, there is an entire investment strategy dedicated to this theory. In this strategy you buy the top 10 dividen yielding stocks for a financial years and then after holding them for one year sell them and replace them with the top 10 stocks for that year. This has been a very popular investment model with active investors and asset-allocators.
As with any investment process it is essential to consider your risk tolerance and do ample research to ensure that you are comfortable with any investment decisions you might be making. While there are a lot of stocks in the market which appear to be yield stocks it might be beneficial to conduct both fundamental and technical analysis prior to settling on the investments you feel would work for you.
Reference:
- Dividends for the long run – CNN Money
