Notes

High Yield Dividend Stocks - How exactly to Pick so when to Buy
Buy What You Know

Why is a specific stock yielding a dividend significantly higher than other stocks? There may be many reasons. A high dividend is often a sign of high risk. If the risk is real or perceived is a question that every investor must determine. Another factor may be the type of stock. If it's a Business Development Company, a Master Limited Partnership, or a Real Estate Investment Trust the high dividend is at 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 may be a result of the price of the stock having dropped significantly because of an overall downturn on 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 exactly the same the yield goes up. Again this may or might not reflect the actual valuation of this stock in mind. What all the above boils down to is know the stock you are evaluating. Know the business enterprise it really is in, know where it stands versus its competition, and know how it is performing currently versus previous quarters/years. Unless you know what an organization does, or don't understand what it does you should eliminate it from your screening universe.

Price Considerations/Timing

In which a stock's price is in its range is a very significant factor. Every stock moves along regardless of whether the market is within an upward or downward trend. Many of these moves are market driven, plus some are driven by very specific actions. High yield stocks tend to fluctuate greatly prior and subsequent to the ex-dividend date. The dividend capture crowd really wants to get in on the dividend. Those interested in capital gains want to buy before the pre ex-dividend rise, and sell before the ex-dividend drop. Many investors simply want to buy prior to the dividend, while others like to buy following the stock drops following a ex-dividend date. get more info can be greatly impacted whenever a company sells additional stock to generate funds.

Since BDCs, MLPs, and REITs need to pass through most of their profits they often times sell additional stock to fund new growth. Very often this is regarded as a dilution and many stock holders sell right after this type of announcement. The key here's 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 a lot more than overcome the upsurge in shares outstanding. Often the best way to make this determination is to see what has happened historically and looking at what the business says they plan to do with the amount of money received from the sale of stock. In short, being aware of a person stock's typical price cycle and what impacts it is important with regard to timing a buy.

Statistical Metrics

Look at price earnings ratios to see where a particular equity fits among its peers. If the PE is quite high compared to other companies like themselves it raises a red flag. Likewise if it's too low in comparison to similar outfits the question is, why? Obviously a minimal PE caused by an irrationally low price is the kind 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 the particular stock in question along with the industry that it is in.

Questions that require to be asked: May be the dividend safe? Is the dividend fully supported by earnings or distributable cash flow? What percent of earnings are paid in dividends? In manufacturing companies you should know the company's debt to equity ratio. It is generally a given that it is better to have significantly more equity than debt yielding a debt to equity ratio of less than 1. Similarly it is generally favorable to have more current assets than current liabilities, and a current ratio of 2 or even more is generally an excellent guideline. With MLPs, REITs and BDCs, these ratios usually do not give as clear an image and things such as for example distributable cashflow, hedging, leverage, yield curve, and interest trend, are as important or even more vital that you 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 really is obvious, however that large more developed companies that have many years 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 might not be in the future.

Analysts

Most equities are evaluated by at least one analyst and many are evaluated by four, five or more. Opinions are based on fundamentals, technical analysis, or perhaps a combination of both. Additionally, there are many on-line services offering computerized analysis such as MSN Money (free) or Value Line (paid) that plug a stock's metrics right into a formula which produces an "opinion". Analyst ratings are interesting as often 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 looking at analysts' opinions offers a helpful background check and is a way to obtain thought provoking information, they are not a substitute for your own homework 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. Nobody knows how much cash you will need to allocate toward a specific sector or equity a lot more than you. So while it is informative to check out analysts' reports, understand that they are only opinions, and when you do your homework 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 go to the High Yield Equity Stock Report for further articles and a regularly updated high yield dividend stock list: http://www.highyieldreport.blogspot.com This site is dedicated to assisting investors with their homework in the highly volatile and often misunderstood group of high yield dividend investing within a diversified investment program.
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