The basic goal of investing is to make an attractive return on your money. Whether you do it through savvy stock picking skills, or through focusing on acquiring dividend income, the key is to pick the right stocks for your portfolio. A company's financial strength and prospects for continued growth in earnings are among the most important qualities to look for when picking stocks. Stock prices rise when a company continues successful operations. Dividends also rise when a company continues to post excellent earnings -- rising dividends tend to indicate stable growth in the stock.
1. Use online stock filtering tools, which are available online from most brokerage firms. These tools will allow you to search for minimum earnings growth and dividend yield, and pick the stocks that appear most attractive. Unless you have specific industries in mind, just compile a list of preliminary picks to further analyze.
2. Examine your preliminary pick list with regard to economic trends and the outlook for the industry represented by each stock. If you are seeking price appreciation, look for an industry that is coming into its prime growth phase of the market. If dividend income is most important, electric utilities and companies that are leaders in their respective industries can be your targets.
3. Check out the stock price charts for companies that appear attractive out of the remaining ones on the list of preliminary picks. If there are any significant price movements, investigate the reasons why by searching for company news preceding or during the price fluctuation. Note the long-term direction of the stock price. Compare it to a chart of the Standard & Poor's 500 to see if the stock price movement is in line with the broad market.
4. Read news releases for the past year or longer to learn of any problems or achievements experienced by the companies you are considering. Pay close attention to news that might give a hint of future growth prospects, or indications that the board of directors is considering a change in its dividend policy.
5. Complete the due diligence by checking the company reports, such as the quarterly and annual reports and insider transactions, of the companies you are still considering. These can be found online in the Security and Exchange Commission's EDGAR database.
- Look for steadily increasing earnings growth over at least five years. Reliable earnings through recessions as well as boom times is a good indication of a potentially good investment. A price-earnings ratio (P/E) of 20 is a standard level to begin looking. For dividend yields, check the yield-to-maturity on the 10-year Treasury bond, and add 100 basis points to find a good starting point for dividend filtering. Adjust your filters until you find a good list of stocks because market conditions change and P/E ratios and dividend yields change with the market.
- Be cautious of stocks with high dividend yields. The high yield may be a result of a drop in price, which itself could be a result of poor earnings growth. In that case, there is a potential for the dividend to be cut or omitted entirely so the company can improve its financial position. High dividend yields are also seen when the broad stock market declines, or bond yields decline and leave dividends high in relation to Treasury or corporate bonds. If bond yields continue to be low, companies often reduce their dividends to maintain a certain relationship between their dividend yields and bond yields.
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