22 Jul Important Factors to Consider when Choosing Dividend Stocks

Many investors are attracted to dividend stocks because these investment instruments provide a predictable source of fairly stable income. Dividend stocks also have the potential for capital appreciation and can insulate against market volatility. They are more attractive than bonds in a volatile and uncertain marketplace.

When choosing which dividend stocks to add to an investment portfolio, it is crucial to consider the following factors:

Dividend yield

When approaching this factor, there is need to first understand the importance of risk/return trade-off. Generally, the riskier an investment is, the more potential it has to yield high returns.

When an investor decides to buy dividend stocks from a company that’s in a perilous financial condition, they bank on the promise of high dividend yields. However, such companies should be approached with caution. The investor must examine the company’s rate of growth, operating income and free cash flow to determine or predict whether or not the company is financially capable of paying the dividend in future.

Investing in dividend stocks of such a company is accompanied by a high potential risk. The investor not only risks quarterly dividend payments but also a possible drop in the stock’s price.

Investors should watch out for “dividend traps” before adding a dividend stock to their portfolio.

Predictability of dividends

Big and relatively stable companies have a reputation of paying regular dividends. If a company has been raising its dividends per year for more than 10 consecutive years, it is likely that this trend will continue in the future.

Investing in companies whose stock prices and dividends are more predictable is less risky and could increase the value of an investment portfolio. Most risk-averse investors prefer buying dividend stocks from companies that enjoy a high market share as opposed to startups.

Research about the financial situation of the company

Dividend yield does not always reflect the value of the company. Qualitative analysis is vital prior to investing in a company’s dividend stocks. Get all available information about the company’s management board, its reputation of disclosing information and its short-term plans.

It is crucial to remember that the decisions made by the company’s management today will affect return on investment in dividend stocks tomorrow. Hiring an experienced investment manager is sometimes the best way to ensure informed decisions are made before choosing which investment instrument to include in a portfolio.

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