The dividend yield tells you how much a company pays out in dividends to shareholders relative to its share price. For investors, it is an important metric that helps them assess the potential returns of investing in a particular stock.
The higher the dividend yield, the more attractive the investment may seem as an income source. However, in reality, high yielding stocks may not always be the most reliable ones.
So, how can investors find reliable dividend yield investments? Let’s find out!
Table of Contents
1. Look for Stocks With an Optimal Dividend Yield
When it comes to finding a reliable dividend yield, you should prioritize stocks with a yield that is neither too high nor too low. Generally speaking, a dividend yield that falls between 2% and 5% is considered optimal.
Stocks with a dividend yield higher than the market average may be potentially risky investments.
For instance, if the price of stock A is continuously decreasing, its dividend yield will mathematically increase. However, a continuous price decline could also indicate poor performance on behalf of the company and the resulting loss of investor confidence.
On the other hand, a very low dividend yield is also not desirable as it will not generate enough income for you.
If you’re looking for an easy way to find companies that offer optimal dividend yield, consider income investing with HALO Tech. Just add a filter, choose your desired yield, and you’ll be presented with a list of all the companies and stocks that meet your criteria.
2. Cash Flow
Once you’ve filtered out stocks with optimal dividend yield, you can focus on their financials to make sure that they are reliable.
The cash flow statement is one of the most important financial statements. It tells you how much money a company is generating and spending each period.
It is a good indication of the company’s financial health. Having a regular and consistent cash flow trend shows that the company is in a good position to sustain its dividend payouts.
You can also look at the payout ratio to get an idea of the company’s ability to pay out dividends. The payout ratio tells you how much of its earnings a company pays out in dividends.
If the payout ratio is too high, it could indicate that the company may not have enough profits to increase its dividend payments in the future.
3. Dividend Growth
Another important metric you should consider when looking for a reliable dividend yield is the dividend growth trend.
You can analyze a company’s past dividend payments to get an idea of whether it has a history of increasing or decreasing dividends.
If the company has been regularly increasing its dividend payments over a long period of time, it is likely to continue doing so in the future.
On the other hand, if a company has been decreasing its dividend payouts or has been paying out the same amount for a long time, it might be a sign that they may not have the financial resources to increase it in the future.
4. Debt to Asset Ratio
Debt to asset ratio is another indicator that can help you determine the reliability of a dividend yield investment.
It is calculated by dividing total liabilities by total assets and tells you how much debt the company has relative to its assets.
A low debt to asset ratio is a good sign because it means that the company does not have too many obligations and can more easily fund its dividend payments.
5. Past Earnings
A steadily increasing trend in profits over the last five years provides strong evidence that a company is doing well and can continue to pay out dividends in the future.
You might come across certain years when the profits have declined. However, if those declines are short-term and the overall profits have been increasing, then you can be more sure that the company is in a good financial position.
When assessing the past profits of a company, it’s important to remember that economic disruption is an unavoidable reality. But it can be managed. If the company you’re looking into fared better than its competitors during times of market downturn, this can be seen as a good indication of their ability to weather difficult periods.
6. Sector Strength
Finally, you should consider the overall strength of the sector in which the company operates. Companies located in strong sectors are likely to be more resilient and have an easier time sustaining and increasing their dividend payments.
You should look at the performance of the sector over the last few years to get an idea of how it has fared economically. If the sector has been performing well and is projected to continue doing so, then you can be more confident that the company you’re looking at can continue to reward shareholders with dividend payments.
So these were some of the key things you should consider when looking for a reliable dividend yield. Remember, take your time and do your own research to make sure you’re investing in a dividend yield that is likely to be sustainable and increase over time. Here are the best 10 dividend stocks to get you started.And if you’re new to stock trading, finding the right broker can be challenging. Here’s some advice to help you make your choice. Although this guide is specifically for CFD brokers, the advice it provides is equally applicable and helpful for stock trading brokers. Good luck!