How to Shop Dividend Stocks

Dividend stocks are very good investment for the value investors. Such stocks provide steady income on a regular basis in accordance to the dividend schedule of the company. Most companies declare their dividends on a quarterly basis. Because of this, the income from the dividends has to be reported to the IRS for the qualified year for tax purposes. Most retail investors holding the "ordinary stocks" receive "ordinary dividends" ans this income counts toward the ordinary income of the individual. That's why the dividend gain can be considerable less after taxes, especially if your income from other sources is in the higher tax brackets. Under such circumstances, it is a good idea to shop for stocks which provide a high dividend payout as a cost of each unit of stock. Many companies borrow money as debt to pay towards shareholders dividend. Such companies will have a handsome dividend payout, but the stock price of such companies will keep on plummeting due to decreased stock holder equity caused by increased liabilities on the balance sheet. Hence, it becomes important to research about the dividend history and the historic stock price before making a decision about investment in dividend stocks. Some rules of thumbs when considering buying a dividend stock are:

1. Check the dividend payout history. Dividend payout is defined as Total Dividend Paid in the year/Stock price. Since stock price in an year is fluctuating, it makes sense to see the fluctuations in the price and use an average price for that year. Make sure that stock price is not widely fluctuating, and so is the dividend payout. A steady payout ratio over last few years is an indicator of good health of the company. 

2. Shop for the dividend stocks when the stock price is low during cyclic downturn in the market. Assuming that the net dividend paid after you make your investment is in the same range as was being paid at the time of your investment, your payout formula in point #1 will use this low stock price in the denominator. 

3. Make sure that the stock price sees cyclic downturn and upsides, and is not constantly on decline for more than a year. 

Some stable market segments such as oil, pharmaceuticals, and consumer goods industries have large corporations paying a steady and healthy dividend over last few years. Such companies make the best fit to invest in dividend stocks during the market downturn.  In next few posts, I will share some of the high dividend payout stocks from each of such market segments.