When a stock pays a dividend, it sweetens the pot.
Investors get a quarterly bonus on their shares, and that extra money can compensate for slow growth. But what if you are sacrificing growth for dividends?
Some stocks like Warren Buffett's Berkshire Hathaway don't pay dividends, although Berkshire owns high-dividend stocks like Coca-Cola and HP.
Dividends come out of a company's profits. It's a way to attract investors, although the share of companies' profits that is used for dividends is not spent on growth. For investors, the decision to buy a dividend stock is often a choice between steady income or speculation on big share-price gains. Sometimes, you get both.
A Dividend Plus Growth Formula: IBD Tools
Dividends are pennies on a share. However, they add up when you own hundreds or thousands of them.
Besides a payout, you want to buy dividend stocks that show stability or even some growth. Two ways of doing that is by looking at the dividend yield and the stock's chart.
The dividend yield is the annualized dividend a company pays divided by the stock price. If the dividend is increasing even if the stock price remains within a narrow range, the yield goes up. That means more money is returning to you for each share you bought.
Take Suncor Energy, a stock on the Dividend Leaders screen. Its annualized yield is 4.58% while dividend growth is an impressive 37%. Earnings rose 165% to 465% the past three quarters. The stock is trading near three-month highs.
The IBD Dividend Leaders, REIT Leaders and Utility Leaders screens can help you find stocks with good dividend yield. The screens look for high yields and dividend growth rates. The best ideas from those screens are covered in the Income Investor column.
But be careful if the dividend yield is getting too high. That could mean that the denominator in your division — the stock price — is falling. It does not make sense if dividends grow but the underlying stock is crashing.
You can tell when dividend stocks are not likely to sell off by studying their price and volume charts. A good chart setup should have several checks ticked off, such as breaking out from a base with strong volume. Or they could be finding repeated support at the 10-week moving average.
That is also a reason why buying dividend stocks in a weak stock market may not work.
Dividend stocks can perform better in weak markets. But even if investors seek yields, the broad pressure from the stock market will likely take these stocks down as well.
Stable Earnings In Dividend Stocks
You should also make sure the stock has stable earnings. Stable earnings support the price of the stock.
The Earnings Stability Factor, found in MarketSmith, measures how much a company's recent earnings fluctuated. The lower the score, the more steady the earnings.
A simple way to play dividend stocks is to own an ETF. The S&P 500 Dividend Aristocrat ETF tracks the S&P 500 Dividend Aristocrat Index. The ETF's holdings have companies that have shown dividend growth and earnings stability with profit and growth.
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