Investment Strategies: How Safe is the Company´s Dividend

There are two ways to earn in the stock market, Capital Appreciation (Capital Gains) and Dividend Payout.  Capital Appreciation or Capital Gains is the increase in the stock price since the stock was bought (current price of the stock mind purchase price).  Dividend Payout on the other hand is when the company elects to pay out a sum of money to the shareholders for each share an investor holds.  Not all companies payout dividends.

Investors should understand that the dividend payout can change at anytime and should be ready to make quick decisions when this happens because this could also affect the price of the stock and could affect the capital gains

Following are some of the things to look for in analyzing a company´s Dividend Payout Sustainability:

  1. High Dividend Yield – Watch out for high dividend yields.  Investors who are worried about dividends being cut or discontinued usually starts to sell their stock holdings in the company.  This pushes the dividend yield higher.
    • Dividend Yield Ratio
  2. Debt Load – Companies that are highly leverage compared to their peers in the industry in the long run may trigger the company to cut their dividend pay to their investors.
    • Debt to Equity Ratio
  3. Poor Fundamentals – Look if the revenue or net income is higher than the dividends being paid out.  Companies that are paying dividends higher than the companies earnings per share tend to cut dividends in the long run.
    • Earnings Per Share
    • Revenue Growth
    • Dividend Per Share

There are other fundamentals that should be considered but knowing the warning signs by using the above analysis should be a good start.

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