Each investor has different goals. Only you know what you are investing in and how you will spend the money. Two questions that most investors have to figure out is, “Do I want to invest for the future or do I want to realize some gain on my investment now?” There is no right answer, and for many investors, the answer is a combination of the two. For today’s purposes, we are going to look at wanting income now. While there are different ways to achieve this goal, we are going to look at stocks that pay out a dividend.
Dividend stocks pay out a slice of the company’s earnings to investors on a consistent basis, usually quarterly. Not only do most dividend stocks give investors a set amount each quarter, but the best ones also increase that amount over time so that you, as an investor, have an income from the stock resembling an annuity.
Dividend stocks differ from growth stocks as you are looking to cash out later with the growth stocks, preferably making a nice profit. The dividend stocks, overall, do not have the huge swings that you can have with growth stocks. They hold at a steadier rate, and you can generally count on them as a more stable investment compared to growth stocks. However, they still have a degree of stock market risk.
Many investing websites will produce a list of stocks that give a dividend. Once you have something like that, then it is time to evaluate the stocks. The easiest way to get a quick snapshot of a stock is to compare its dividend yields with those of similar stocks. If a yield is a great deal higher than compatible companies, then that should be a warning light going off. If nothing else, you know you have to look into that company more before deciding if you should buy its stock.
The next step is to examine the payout ratio of the stock, which informs you of the percentage of the company’s income that they use to pay dividends. While it depends on the industry, a company that employs more than 80% of its revenue to pay dividends is too high of a ratio. If you ever see that the dividend payout ratio is over 100%, you know the company needs to go into debt to pay dividends. You should avoid any dividend stocks in that category.
One more vital element to examine is the safety of a stock’s dividend. As a general rule, if a dividend yields over 4%, do your due diligence! If you find any stock that is at or over a 10% yield, definitely be aware. A stock that is too high in its dividend yield can indicate that a long-term payout is not sustainable, and it might suggest that investors are selling the stock. When that happens, the share price drops, thus increasing the dividend yield.
If you look at a list of stocks that offer a high yield, you will see that there are some energy stocks in there. Traditionally, these dividend stocks have always been a decent investment. For decades, the need for energy throughout the world has seemed inexhaustible. Investing in energy companies, whose primary business is usually in oil, seemed a safe bet. However, let’s look at two events in 2020 that have made investing in energy stocks a lot riskier.
We have watched in the news how Russia and Saudi Arabia pretty much had an old-fashioned oil war as they continually tried to undercut each other in price. That had the ripple of effect of making United States’ oil sell for so cheap that production has ceased because it wasn’t worth bringing it out of the ground. Throw on top of that the fact that there was pretty much an oil supply glut anyway, and suddenly energy companies’ income shrank dramatically.
Besides oil economics, we have also been dealing with COVID-19 at the same time Russia and the Saudis were having their hissy fit. Suddenly, America wasn’t traveling anymore. With various stay-at-home mandates across the country, people were not going into work, and nothing was opened to go to and have fun at either. So, we stopped driving. Factories that shut down didn’t need the energy to operate. The need for fuel dropped even fuller. President Trump, on April 10, in responding to a reporter’s question, said, “We don’t have room to store oil anymore. We are using ships to store it.”
Unfortunately, 2020 has shown us that standard practices and trends can change – sometimes dramatically. You can see in energy dividend stocks that unforeseen events can hurt a company to the extent that it might have to change its dividend. The oil companies are the most straightforward example to use. However, as you are looking for good dividend stocks, remember that what we are experiencing a massive trickle-down effect on companies and investments from a nationwide shutdown that we never experienced in the past. Keep that at the forefront of your mind as you investigate dividend stocks – most companies will be negatively affected somehow. Those companies that offer dividends can have issues preventing them from doing so.
More than ever, you do need to do more research and tap the brains of smartest retirement income and investment advisors. If you like this then probably you will like my Special Report – “How to Recover Stock Market Losses From the COVID-19 Crisis Quickly & Safely – without liquidating your portfolio or replacing your investment advisor” and you can get it here.