Some stocks yield significantly higher dividends than others. It is commonly seen as an indication of higher risk, but whether it is perceived or real is something that an investor should determine. High dividends could also result because the price of the stock has dropped significantly due to bad news or an overall market downturn. In this case, dividends stay the same although the price drops. This certainly doesn’t reflect the real valuation of a stock, but it is still possible for investors to take advantage of the situation. It simply boils down to understanding stocks that we are evaluating and knowing whether they will provide higher dividends than others. Here are factors we should consider in high dividend stocks investing:

  1. Timing and price considerations: Two essential factors in high dividends yield investing are timing and price range. We should know whether the market exerts downward or upward trend. Some of the factors are market-driven but stocks could also be affected by specific internal situations. Prior and subsequent to their ex-dividend dates, high yield stocks often fluctuate significantly. Investors typically want to purchase stocks before the pre-dividend rise and sell before the ex-dividend drop to maximize their profit. It should be noted that prices could be affected greatly when companies sell additional stock to gather more fund.
  2. Dividend yield: It is a ratio that defines how much a company offers dividends each year based on the stock price. It’s calculated by dividing Annual Dividend with Stock Price we paid. As an example, if the annual dividend payment is $1 and the stock price is $20, then it has 5 percent of dividend yield. There are two approaches to calculate dividend yield, first by using the dividends for the 12 trailing months and another by using the amount dividend of the 12 upcoming months. Before purchasing a stock, we should know our preferred yield. Higher dividend yields provide higher profitability. However, as stocks price fluctuate, the dividend yield will move up and down as well.
  3. Sales and profit: It’s very simple, no sales means no revenue and no profit. Without profits, it isn’t possible for companies to pay dividends. This should be a very simple indicator to know and we could check whether the company has reported good sales and profits. Profits are necessary to help companies grow and this could lead to more dividend payouts. One basic rule to measure profitability is by looking at the company’s ROE (Return on Equity).
  4. Debt: Debt is the amount of money that the company owes. Companies will have more money to pay investors when their debts are lower. The amount of dividend paid could be affected if revenues drop and the company goes through tougher times. Based on Debt to Equity ratio, investors could immediately see if the company has high debt.
  5. Payout ratio: Payout ratio is calculated by dividing annual dividend per share with company’s annual revenue per share. Investors should look for stocks with higher payout ratio.

Before investing in high yield dividend stocks, make sure you do you research in the company. The last thing you want is to buy a lot of shares in a company with a very high dividend yield and the overall value of the company lowers as well as the dividend payouts.

Nazmus

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