What Are Dividends?

A company that makes money oftentimes pays a portion of its profits to shareholders on a quarterly basis. Sometimes this dividend is a onetime payment based on exceptional circumstances. However, when we suggest that you invest in dividend stocks we are talking about companies that send a shareholder a check every fiscal quarter. Dividends from a strong company are a reliable source of cash. They are also proof of the strength of the company and should be considered when doing fundamental analysis of a stock. In some ways dividends are like interest from bonds. A secure company will pay a set dividend that does not change with prevailing interest rates. Thus the price of the stock may go up with lower interest rates and down with higher rates.

High Dividends of Consistent Dividends

The general reason to invest in dividend stocks is long term, consistent dividends. This is what helps you sleep at night as a stock investor. The higher the dividend the better but if a company is stealing from R&D capital to pay dividends it might just be getting a little too desperate to keep its share price up. For long term reliable dividends companies like Colgate, Clorox and Proctor and Gamble come to mind. These reliable consumer products companies keep making money year in and year out. If you do not want to wake up some morning to find that your stock portfolio has evaporated invest in dividend stocks like these. Other sources of reliable and healthy dividends are utility companies.

Finding Good Dividend Stocks

Running a stock screen is a good way to find companies that pay dividends. If you require a certain percentage dividend return set the stock screen to show only stocks that make the cut. Look at how long the company has been paying dividends and check to see if there are gaps in their payment record. Along the way look at the general margin of safety of the company and its intrinsic stock value. You can always profit by using fundamental analysis. Well managed companies with strong profits and competent cost containment typically pay good dividends and are good investments for the long term. For a well balanced stock portfolio, investors commonly invest in dividend stocks as part, growth stocks as part, and invest in a mix of market sectors as well. Remember that dividend stocks commonly increase in value during a down market. As such it can be possible to buy these in anticipation of a recession and sell when they move contrary to the market.

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