What we can do here is if we’re using Yahoo finance, go to the statistics and then you can look a little bit more about their actual dividend and their other Financial metrics that you can take a look at, but looking at their dividend, there’s a couple things that you want to be aware of. One of them is the payout ratio. This is a very important Financial Metric you want to consider when looking at dividend stocks and the payout ratio is essentially just going to be the dividends as a percentage of their earnings – what shopify theme is that.
So, if you’re seeing this number quite High say over a hundred percent, this could be somewhat of a red flag, showing that maybe this company isn’t able to actually sustain those dividends that they’re paying out and this is what I really want to caution you on. You see, when I mentioned that I started pretty young in the stock market, nobody was really showing me the way so because of that I made a lot of mistakes. One of them was that I was falling into dividend traps and I don’t want to see people do this for themselves.
So essentially dividend tramps, what can happen is a company might have a very high dividend to attract investors and then either / that dividend as a new investors come in or just not be able to increase their stock price because they’re paying out so much money in dividend payments that they’re not able to reinvest back into their own business. So, to give you an example here, when I started investing, I would look at companies obviously. Okay. Well perhaps he’s paying a 3% annual dividend then I’d find another company is paying 6% dividend and then I say, well here’s this other companies paying a 12 percent annual dividend. This looks like such a good deal and when something looks too good to be true in a lot of cases it is, that’s how it works in the investing world – when something just looks too good to be true, there could be something fishy behind the scenes that you might not fully realize at the moment.
If you’re seeing companies that are paying out very high dividends, you want to look at the payout ratio, you want to look at their history of paying dividends as well as their stock price, because something else you want to consider is, you want to look at this company’s dividends over their lifetime but also their stock price and factor those two into the equation. To give an example here say that we have two companies. One company pays out a 6% annual dividend, but their company stock is losing four percent per year over the past 10 years.
Well, your total gain on that might only be about 2% per year because you’re getting a high dividend but the company is not growing. In reality its declining, so that’s actually not that great versus maybe another company that’s paying out a 3% dividend but growing at a 4% rate, so you can be only 7% on that one with a smaller dividend, but a company stock that’s actually increasing. So that’s a great example for something like Pepsi. They’ve been increasing over the long run same for Coca-Cola been increasing their dividends as well as increasing their stock price in the long run, which is something you would definitely consider.
So don’t just look at the dividend. I sort of think of a dividend payment as really a cherry on top. It’s not the first thing you want to look at, but certainly something that you do want to factor in the equation as to whether you’re going to invest into that company or not invest into that particular company. Now, there are a number of different Financial metrics that are going to be incredibly important when looking at dividend stocks, one of them being the price to earnings ratio. This is especially important for people who are investing into those blue chip stocks, where their stocks that are necessarily High fast growth but more so well-established company. So, the price to earnings ratio P/E ratio, you can have to take very close account into that and then also looking at the earnings per share. So how much money is this company actually bring in per share. What are the earnings on that?