High Yield Dividend Stocks How to Pick so when to Buy

Buy What You Know

Why is a specific stock yielding a dividend significantly greater than other stocks? There can be a variety of reasons. A high dividend is often a sign of high risk. Whether the risk is real or perceived is a question that each investor must determine. Another factor may be the type of stock. If it's a small business Development Company, a Master Limited Partnership, or perhaps a Real Estate Investment Trust the high dividend reaches least partially a result of the government requirement that the vast majority of the income is passed to the stockholder/unitholder so that you can maintain a corporate tax free status.

A high dividend might be a result of the cost of the stock having dropped significantly due to an overall downturn available in the market, a downturn in that specific sector, or bad news in that specific equity or in an equity with similar characteristics. Obviously once the price drops and the dividend stays the same the yield rises. Again this may or might not reflect the specific valuation of the particular stock under consideration. What all of the above boils right down to is know the stock that you will be evaluating. Know the business it is in, know where it stands versus its competition, and know how it is performing currently versus previous quarters/years. Unless you know what a company does, or don't understand what it does you need to eliminate it from your screening universe.

Price Considerations/Timing

Where a stock's price is in its range is an extremely significant factor. Every stock moves up and down regardless of whether the marketplace is within an upward or downward trend. Some of these moves are market driven, plus some are driven by very specific actions. High yield stocks tend to fluctuate greatly prior and after the ex-dividend date. The dividend capture crowd really wants to get in on the dividend. Those interested in capital gains need it before the pre ex-dividend rise, and sell prior to the ex-dividend drop. Many investors simply need it prior to the dividend, while others prefer to buy following the stock drops following the ex-dividend date. Price can be greatly impacted whenever a company sells additional stock to create funds.

Since BDCs, MLPs, and REITs have to pass through most of their profits they frequently sell additional stock to invest in new growth. Very often this is perceived as a dilution and several stock holders sell right after this sort of announcement. The key here is to determine whether or not it is actually a dilution or if the new income from the growth funded by the sale of new stock will more than overcome the upsurge in shares outstanding. Often the best way to create this determination is to see what has happened historically and looking at what the business says they intend to do with the money received from the sale of stock. In a nutshell, being aware of a person stock's typical price cycle and what impacts it is crucial with regard to timing a buy.

Statistical Metrics

Look at price earnings ratios to see in which a particular equity fits among its peers. If the PE is quite high compared to other companies like themselves it increases a red flag. Likewise if it is too low compared to similar outfits the question is, why? Obviously a low PE caused by an irrationally good deal is the type of opportunity to look for. Metrics such as for example price to book value, price to sales, price to cashflow, should be viewed within the historical framework of this stock in question as well as the industry that it is in.

Questions that require to be asked: Is the dividend safe? Is the dividend fully supported by earnings or distributable cashflow? What percent of earnings are paid in dividends? In manufacturing companies it is important to know the company's debt to equity ratio. It really is generally a given that it is better to have significantly more equity than debt yielding a debt to equity ratio of significantly less than 1. Similarly it is generally favorable to have more current assets than current liabilities, and an ongoing ratio of 2 or even more is generally a good guideline. With MLPs, REITs and BDCs, these ratios do not give as clear an image and things such as for example distributable cash flow, hedging, leverage, yield curve, and interest trend, are as important if not more important to understand. Again, it really comes down to understanding the company under consideration.

In evaluating high yield equities, size of a company is less important than its position among its peers, its historical performance and projected future results. It is obvious, however that large more developed companies that have a long time of historically growing dividends are likely safer than smaller, newer companies. However, the recent crisis on Wall Street and the fall of many giants proves that what can happen to be obvious might not be so, and what historically has been safe is probably not in the future.

Analysts

Most equities are evaluated by a minumum of one analyst and many are evaluated by four, five or even more. Opinions derive from fundamentals, technical analysis, or a combination of both. There are also many on-line services offering computerized analysis such as MSN Money (free) or Value Line (fee based) that plug a stock's metrics right into a formula which produces an "opinion". Analyst ratings are interesting normally one analyst will place a buy rating on a stock while another places a sell rating on a single stock in line with the same information. While considering analysts' opinions provides a helpful background check and is really a way to obtain thought provoking information, they're not a substitute for your own due diligence and personal evaluation.

No-one knows what your own personal criteria for buying, selling or holding a stock are better than you. No-one knows your tolerance for risk better than you. No-one knows how much money you should allocate toward a particular sector or equity a lot more than you. So although it is informative to check out analysts' reports, remember that they are only opinions, and if you research your options your opinion is often as good or much better than theirs! Remember, nobody cares more about your money than you do!

Copyright 2009 All rights reserved worldwide, Boyd Investment Holdings LLC.

Bob Boyd invites one to visit the High Yield Equity Stock Report for further articles and a regularly updated high yield dividend stock list: http://www.highyieldreport.blogspot.com This web site is dedicated to assisting investors making use of their homework in the highly volatile and frequently misunderstood category of high yield dividend investing as part of a diversified investment program.