Things to watch out for before investing in Dividend Paying Stocks…!!
We all love to have multiple sources of income. Multiple sources of income help you in having a better standard of living and a secure future. There are numerous ways one can generate passive income apart from their salary account. A stock market is one such place, which allows anyone to earn more income through the art of investing. But most of the time, the investors make the mistake of focusing mainly on the dividend aspect before selecting it. Let’s look at what other factors, one must look upon before selecting a dividend-paying stock.
- About the Company and Its Position:
Before investing in any stock, it’s quite important to know about the company and the sector in which it operates. The obvious reason is that it will provide a glimpse of the company background, whether it belongs to a volatile sector or not. For instance, in case if a company belongs to the volatile sector and highly dependent on regulatory compliance such as energy, pharma and financial. In these sectors, a single point becomes a tipping point for the fluctuations of the industry, eventually affecting overall company.
- Company’s Balance Sheet:
A balance sheet provides complete insight about its income and operational costs. It provides you a clear perspective about whether the company is in good shape or not. In case, if a company is paying good dividend payouts, despite having high debt. Then it’s a concern point. Debt is one of the most important factors to look upon the company’s health. Lower the debt- market cap ratio, the more stable a company is.
- Take a lookout at the payout ratio:
Payout ratio is one of the most important factors to note. It’s mainly used to measure the percentage of the net income that a company pays to its shareholders in the form of a dividend. It provides information about how much a company’s profits are given back to the shareholders. For example, a payout ratio of 10% means that every rupee company is earning, 10% is returned to the shareholder.
- High Dividend Yield:
People do consider higher dividend yield as one of the interesting factors to note. For example, A company with having high dividend yield can be misleading at times. But it may be a result of underperforming security and no use if the capital base is misleading. An investor should never base its decision on a high dividend yield only.
An investor should never base its decision on one or two key metrics. Looking out micro and macro information such as fundamental soundness, earning growth and profit will be key things before deciding.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing