While the days of buying a stock and never worrying about it again are over, retirees looking for immediate income will likely have long-term relationships with a few dividend-paying stocks.
With that in mind, here are few tips on how to sort through the options.
1. Look for a company with a long dividend history. Many pride themselves on having continuously paid dividends for many decades.
2. The company's payout ratio should be no more than 80% of its earnings per share. If a company earns $0.50/share and is paying a dividend of $0.75/share, it could be in trouble. It's important to compare the earnings per share and the dividends per share of any investment candidate.
What if you discover that a company is paying out more than it's earning? Maybe it sold off some assets — a one-time event — and it's paying out part of the proceeds in dividends. That's not a problem. However, if the company is recklessly borrowing money to pay the dividends, that's a huge red flag.
3. Choose companies with a worldwide market presence, as they provide somewhat of a hedge against inflation.
4. Pick companies with a stable product line. Whether it's beer, food, oil, or computer chips, the company you're investing in should have a core business with a worldwide need for its product.
5. A dividend-paying company should have lots of cash. Check a company's current ratio, which measures its ability to meet short-term obligations. The "current ratio" is the ratio of current assets to current liabilities. If a company's current ratio is greater than 1, it's in good shape.
6. Pick a company that sticks to its core business. During the Internet boom, many companies were swapping stock and buying up businesses all over the place.
It's one thing when a pharmaceutical giant acquires a smaller drug company. That makes good business sense. It's quite another story when a company like General Electric decides to buy NBC because it wants to be in the media business. Every company needs to keep its competitive edge, but there's a benefit to knowing what you're good at and sticking with it.
7. Stock-price stability is also important. We need to continually remind ourselves that no matter how big or stable a company, its stock price can still fall. The stock prices of many huge, dividend-paying companies tumbled in the 2008 crash. However, they experienced less damage than the total market, and they recovered more quickly.
8. Some of the better yields are in sectors that experience more volatility. A prudent investor will diversify his dividend-paying stocks among different sectors to reduce the overall impact of market swings.
9. Look for a company with a history of buying back its stock. It's a big plus if the company has enough earnings to pay good dividends and buy back stock at the same time. Having stock appreciation in addition to generous dividends is the overall goal.
10. A company with a history of increasing its dividend is ideal, so check to see if the company has a pattern. Many old-line moneymakers have done very well for their shareholders by increasing their dividends every year.
11. Check the current dividend yield percentage. There are many good dividend-paying stocks out there, but you should factor in the price of any company you're considering. Look for companies paying at least 3%.
12. Set a trailing stop loss. You don't want to ride a stock down just to see your dividend income eaten up by loss of principal. A stop loss helps to keep that from happening.A traditional stop loss uses a fixed price. If you buy a stock for $100 and put in a 20% stop loss on it, you have an immediate sell order if the stock drops to $80.
A trailing stop loss is a little more sophisticated; it adjusts the start point every time the stock hits a new high. This gives investors the potential to lock in profits and still protect themselves.
Source : Marketwatch