How to Pick High Paying Dividend Stocks

If the dividends of a dividend stock are down, it may mean trouble.

A dividend stock is a stock that pays you in additional company shares rather than cash. This type of stock also pays higher returns than non-dividend stock, according to John Dalt of Galtstock Research, making it a popular investment. Investors searching for stock that pays high dividends should start by examining the financial durability of the company issuing the stock.

Things You'll Need

• Investment broker

Instructions

Investigate the Company

1. Research the company's business. Look for a simple plan that focuses on the company's main business activities and not other overly ambitious expansions.

2. Pick a company that doesn't deal in unusual products that may not weather economic downturns. A strong brand is paramount, according to the website Investor Place.

3. Investigate the company's finances to determine if they have a substantial cash balance. If they do, they can stay afloat if the economy takes a sudden downward turn.

4. Look into whether the company has low debt balances so they don't have to rely on credit to stay afloat. A company that relies too heavily on credit could affect dividends negatively, according to Galtstock Research.

Investigate the Dividends

1. Calculate the dividend payout ratio (DPR) to determine the percentage of dividends that will be paid out by the company. Divide the annual dividend payout by the company's earnings per share (or annual profits) to get your percentage. Check to see if the DPR is below 60 percent, since a lower DPR means higher dividends for investors, according to Dividend Stocks Online.

2. Look at the company's dividend growth rate over a five-year span. Check to make sure that dividends and profits have gone up over this period of time. The most stable and successful companies, however, can show up to a 25 year history of paying high dividends.

3. Calculate your return on investment (ROI), which is the percentage of what you'll make back after investing in the dividend stock. Take the dividend amount and add it to the stock price, then divide the result by the amount of your investment to calculate your ROI percentage.

4. Check your yield and make sure that it isn't too high. High yields can mean the company is high risk and may have troubles later, according to Dividend Stocks Online.

5. Investigate whether the company's dividends have been cut or reduced in recent months. This can also be a sign that the company is heading toward financial trouble.

Tips & Warnings

• Investor Place recommends that you invest in at least 30 different dividend stocks to safely diversify your dividend portfolio.

• Never overpay for a dividend stock, especially if it's priced at 20 times its earnings.

• Always consult with an investment broker first before investing in dividend stocks.

References

• Dividend Stocks Online: How to Pick the Best Dividend Stocks
• Galtstock Research; Dividend Stocks, Pick The Best (Research for Online Investors); John Dalt
• Investor Place; How to Pick the Best Dividend Stocks; February 2011