If you do your own investing or even if you are just following up on what your investment advisor might suggest, scanning for stocks paying high dividends can be a complicated process. Numerous websites and TV shows will give you this or that reason to pick a stock, however, you MUST do your own research. Further, do not get sucked into some website trying to sell you something by saying “they have the best stocks paying high dividends list” or “buy our top 10 dividend stocks” Plenty of websites offer free research and scanning tools with plenty of information. Take any stock pick you hear about from a friend/family member, come up with on your own, or hear on a TV show and you those free resources to decide if the high yield dividend stock will be right for you. Hopefully, this guide can simplify the process and give you a few pointers to find those stocks paying high dividends.
1.) What Type of Investor are you? People often times hear buzz words like growth investor, value investor, investing for retirement, etc. But what do all these buzz words mean? Well, that is up to you and your investment advisor to figure out. That may not be the easy answer, but your investor type determines how you should scan for stocks paying high dividends. For example, if you are a long-run value investor, you may be looking for a low beta with a moderate to high dividend yield stock that you can hold for years and not worry about the ups and downs that may occur. If you are this type of investor, scanning for stocks paying high dividends that carry lots of risk would not be very wise. These high risk, high paying dividends are most likely geared towards short holding or the stock itself may be in trouble. Once you understand your investment type, it will be much easier to understand how to scan for stocks paying high dividends that fall into your investment goals.
2.) Does the company make money? Pretty simple question right? Well, may sound simple but it is actually a very in depth metric to look at when scanning for stocks paying high dividends. If a company is not making money and bringing in cash on a quarterly basis, how are they going to pay the shareholders a high yield dividend? If the earnings per share are not consistent and/or increasing, this could be a red flag. But remember, just because the company has 1 or 2 bad quarters does not mean its a bad high yield dividend stock. There have been a lot of economic factors that come into play the past couple of years and as long as the earnings stay consistent and positive it may be worth looking into the stock dividend further. However, if the dividend stock shows signs of a downward trend of decreasing or negative earnings it may be another red flag.
3.) Does the company have cash to burn? Another quick and dirty financial metric to look at is the amount of cash the high yield dividend stock has on hand. High paying dividends means the company is sending out a lot of cash out to its shareholders. So where is that cash coming from? If you take a look at the total cash as well as the operating cash flow, stocks paying high dividends will exhibit nice high positive numbers. If the cash flow numbers are negative and the dividend stock continues to dip into cash pile to pay the high yield dividend, then you may want to avoid the stock.
4.) How much debt does the company carry? The opposite financial metric of cash is debt. Stocks paying high dividends should have little or no debt. Dividend stocks that carry debt is not necessarily a bad thing so that is why you need to look at the amount of debt in relation to the amount of cash. Many people will look at the debt to equity ratio, however, it may be of importance to look at just the amount of cash. While a low debt to equity ratio (approximately under 0.5) is a good thing, cash is what pays the dividends. So when you scan for stocks paying high dividends, can the company pay its debts with just the cash it has on hand. If the answer is yes, then that is most likely one of the better high yield dividend stocks.
5.) How does the technical analysis (the chart) look? Nowadays, many stocks are controlled by big players in the market such as hedge funds, mutual funds, and pension funds. A stock may go up or down for no other reason than some model that some guy build based off a chart is out of sync and that person will look to profit from it. Again, there may be no news, no earnings report, no economic activity, etc to trigger an up or down move in the stock. This is why it is important to pay close attention to what the chart looks like over the last 12 months or so. If you want to add stocks paying high dividends into your portfolio, but do not know much technical analysis simple look if the stock trends up. All stocks move up and down, but if there is a nice upward trend over a 12 month period, then most likely that is a strong technical stock which may move up further. Another technical chart to look for is a sideways or range bound chart. Many of the stocks paying high dividends will stay range bound because the value of the stock is in the dividend and not the underlying price increasing.
As you continue to scan for good looking high yield dividend stocks, remember these 5 points. It will help you find good picks and weed out the bad ones. For these dividend stocks, just think of it as paying your kids an allowance. What if your bank account was near empty or you lost your job? Where would the money come to pay the allowance? Its a simple analogy but a relevant one. Lastly, as stated earlier, remember to stay away from those top 10 dividend stocks list unless you do your own research while scanning for those stocks paying high dividends.
