Lawrence Carrel

Cheat Sheet / Updated 08-02-2023

Dividend investing is nothing new. However, following a dividend-investment strategy is new to many modern investors who've been focused solely on growth investing. If you count yourself among this crowd or are just starting out and plan on investing in dividend stocks, you need to know how to develop your strategy, find and evaluate potentially good dividend stocks, manage your portfolio, and avoid the most common and critical mistakes.

Article / Updated 08-02-2022

Some people are better at bargain hunting than others. What usually separates the clueless from the pros is that the pros know what something is worth. The same is true for finding bargains on Wall Street. You need to know what a stock is worth, and low price isn’t always a bargain. Value investors hunt for bargains, but they buy only after performing some careful research and crunching the numbers. When you spot a stock that seems to be underpriced, ask the following questions to determine whether it’s a real buy: Is this stock down due to market conditions? If the broader stock market is down, possibly due to an economic slowdown or recession, chances are good that most other stocks are down too. If the share price falls but the company’s fundamentals remain strong, this stock may be the bargain you’ve been looking for. (If the market is up but the stock is down, the stock isn’t necessarily a loser. The drop in share price may be an anomaly representing a good buying opportunity. Ask more questions.) When market conditions turn sour, a rational reason for indiscriminate selling is when investors experience a liquidity crisis. Desperate for cash but unable to sell their worst money-losing investments, investors in this situation sell what they can, typically their most liquid stocks and bonds. Often these may be their best investments, but the need for cash forces them to sell. This scenario provides a bargain for the value investor. Is this stock down because of sector news? If bad news comes out of one stock in the sector, traders may flee from stocks in the same sector. If a good company’s stock takes a hit because of another company’s misfortune, that’s a bargain waiting to happen. Is the stock down because it’s not in a sexy industry? At the peak of the tech bubble, anything that wasn’t a technology stock (pretty much anything that functioned as a part of the economy prior to 1980) was considered out of fashion, and their stock prices fell as a result. However, they continued to post earnings and revenue growth. The industrials, manufacturers, food processors, and other standard bearers became value stocks in the late 1990s. Value investors were rewarded for their patience and conviction when the tech bubble burst and investors returned to more traditional companies. Is this stock down because of problems specific to this company? If investors have fled for good reason, sell shares in the company if you own them or avoid buying if you don’t. However, keep in mind that the market tends to overreact and that some negative news can be very short-lived, especially if it’s not true. A passing bit of bad news can trigger a good buying opportunity, but if the news points out fundamental problems in the company’s success or operations, watch out. Be wary of the following: Declining sales or earnings Excessive debt Little or no cash flow Scandal Illegality, such as falsifying documents or insider trading If this stock has a lot of issues, the beautiful thing about the stock market is you don’t have to hang around. Money can stagnate or even rot in a dead stock, but if you sell and put the money into a true value stock, you may be able to recoup some of your losses.

Article / Updated 07-19-2022

Tools, data, and analysis previously accessible only to investment professionals are now readily available on the Web 24/7 and are better and faster than ever. Many Web sites even provide free stock screeners that enable you to search for stocks by price, dividend yield, price -to-earnings ratio (P/E), earnings per share (EPS), and more. Using the Internet’s rich financial resources, you can quickly whittle a list of 4,000 stocks down to about 25 in less than a minute. Hunting on Yahoo! Finance The first finance aggregator (easily accessible collection of headlines, articles, and other newsworthy materials from a wide variety of sources), Yahoo! Finance remains the king. It’s chock-full of information on every company, with news and commentary from 45 well-known financial Web sites. It also provides personal finance stories and exclusive videos. To narrow your list of candidates, you start by entering selection criteria in Yahoo’s Stock Screener. Go to finance.yahoo.com, mouse over the Investing tab, click Stocks, click Stock Screener, and then click Launch HTML Screener. The Stock Screener appears, prompting you to enter selection criteria. The Stock Screener displays a list of companies that match the search criteria you entered. Click the ticker symbol for one of the companies in the list, and a new browser window opens with charts and information about the stock and the company. Googling on Google Finance Fans of Google can celebrate the fact that in addition to serving as a killer search engine, Google offers an outstanding and very easy-to-use stock screener. To access it, fire up your Web browser, go to google.com/finance and click Stock Screener so that the Google Stock Screener appears. You can start narrowing your list of candidates by entering selection criteria near the top of the page. As you adjust your criteria, Google’s Stock Screener updates a list of all and only those stocks that match your search criteria. (If the list doesn’t automatically update, press Enter after you change your criteria.) For a quick stock price, go to the Google Finance homepage, type the ticker symbol into the search box, and click Search. Shining a light with Morningstar Well known as the one of the best firms for the analysis of mutual funds and exchange-traded funds, Morningstar also analyzes individual stocks. On top of a stock screener and much of the same information provided by Yahoo! Finance and Google Finance, Morningstar also provides a staff of unbiased analysts offering commentary on the markets and 1,700 individual stocks. Check it out at http://morningstar.com/stocks. Finding the real data at the SEC No matter where you get your stock ideas from, the real hardcore data comes from the companies themselves. According to U.S. law, all publicly traded companies must file financial statements with the Securities and Exchange Commission (SEC) every quarter. These quarterly reports contain the company’s income statement, which tells you if the company posted a profit, and its balance sheet, which lists the company’s assets and liabilities. You can also find filings listing all legal stock sales and purchases by company insiders.

Cheat Sheet / Updated 02-28-2022

Dividend stock investing may seem daunting, but with a little knowledge of how to find and pick promising dividend-paying stocks, you can invest in these stocks and reap dividends like a pro. Your portfolio will thank you.

Article / Updated 06-30-2021

A balance sheet presents a financial snapshot of what the company owns and owes at a single point in time, typically at the end of each quarter. It’s essentially a net worth statement for a company. The left or top side of the balance sheet lists everything the company owns: its assets, also known as debits. The right or lower side lists the claims against the company, called liabilities or credits, and shareholder equity. Liabilities may not seem like credits to you, but that’s not a typo. In accounting lingo, a credit is a loan. A credit brings cash in that the firm can use to purchase an asset. However, this credit is a liability, a debt that must be paid back at a later date. We use assets and liabilities as our main terms, so don’t worry too much about keeping the debits and credits straight. It’s called a balance sheet because each side must equal the other. Assets equal liabilities plus shareholder equity. In other words, whatever assets aren’t being used to pay off the liabilities belong to the shareholders. See “Shareholder equity” below for more information. Assets Assets are items of value that the company owns. The major components that make up the asset side of the balance sheet include current assets, fixed assets, investments, and intangibles. Current assets include cash and cash equivalents (bank accounts, marketable securities), accounts receivables and inventory. Other assets include investments, like stocks and bonds, and fixed assets, like real estate and vehicles. Copyrights, trademarks, licenses, patents and the company’s goodwill (standing in the community) count as assets, too, and they’re called intangibles. Liabilities Liabilities are sort of like IOUs — together, they represent the total cash value of what the company owes to other entities. Liabilities aren’t necessarily a bad thing. After all, companies have to spend money to make money. They only become a problem when a company is consistently spending more than it’s earning and has no clear and viable strategy to reduce that trend. Liabilities include current liabilities, like accounts payable, and long-term debt, like mortgages. Anything the company owes falls under liabilities. Shareholder equity Subtract total liabilities from total assets, and you end up with the company’s net worth, also known as shareholder equity — the shareholders’ ownership stake after all the debts are paid. (That’s why stocks are also called equities.) Common stock, preferred stock, and retained earnings comprise the three major parts of shareholder equity. They ultimately determine how much each share receives in dividends.

Article / Updated 03-26-2016

Several industrial sectors are filled with dividend-paying companies, and some sectors provide better bets than others for your dividend stock investment portfolio. The following sectors offer the top options for dividend stock investing; when you’re fishing for good dividend stocks, you can improve your chances of hooking some keepers by dropping your line in these holes: Utilities: Electricity, water, and natural gas (suppliers, not producers) Energy: Oil, natural gas (producers, not suppliers), and master limited partnerships (MLPs) Telecommunications: Carriers (U.S. and international) and wireless services Consumer staples: Food/beverages, prescription drugs, household products, tobacco, and alcohol Real estate: Commercial, residential, or office buildings inside real estate investment trusts (REITS)

Article / Updated 03-26-2016

Dividend stock companies often give you signs that their outlooks are promising. Although you shouldn’t bank entirely on a stock’s promise, these signs can help you weed out bad-news dividend stocks that don’t belong in your investment portfolio. Rising dividend payments: A long history of rising dividend payments, in good times and bad, generally indicates a stable company. Look for at least a three-year history; five years is better. Fiscal strength: You want to see debt ratios showing that the company has sufficient financial resources to cover liabilities, as well as continued dividend payments at or near levels of past payments. Look for the following: Quick Ratio higher than 1 percent. Debt Ratio higher than 2 percent. Debt-to-equity ratio at or below 1 percent. Good value: Shares trading below absolute or fair value. Go to Yahoo! Finance and compare the company’s P/E with the P/E for its sector. A below-average P/E may be a bargain. Also compare growth rates and look for companies growing faster than the industry. Predictable, sustainable cash flow: Banks, consumer staples, and utilities have a solid reputation for maintaining positive cash flow. Avoid industries and individual companies that have a track record of erratic cash flow streams. Confident company insiders: If company insiders are buying rather than selling shares, that means they believe in the stock’s strength. Sector survival: Consider companies that seem to be holding their own or even thriving in a sector that’s bruised and battered.

Article / Updated 03-26-2016

Before investing in any dividend stock, you must perform due diligence to ensure it’s a suitable stock for your dividend investing needs. The following checklist helps you ask the right due diligence questions to sift through your stock possibilities: Examine the company’s most recent quarterly statements, including the balance sheet, income statement, and cash flow statement. Look at the income statement to make sure the company is profitable and whether profits are growing. Refer to the balance sheet and income statement to calculate the Quick Ratio and Debt Ratio to determine the company’s fiscal strength. Check out the cash flow statement to ensure the company has sufficient cash to cover liabilities and the dividend without a problem. Crunch the numbers to examine the company’s fundamentals. Financial statements and Web sites can give you dividend per share, indicated dividend per share, yield, and earnings per share. From these figures, you can determine the price-to-earnings ratio, payout ratio, net margin, and return on equity. Explore the company’s Web site and the Web sites of its major competitors to find out more about the industry and the individual companies. Investigate the company on Yahoo! Finance or Google Finance for news articles and key statistics. Read reports written by stock analysts at investment banks to determine whether the company is performing up to expectations. Research financial publications online or off.

Article / Updated 03-26-2016

As with all stocks, you should research the dividend stocks you’re considering before you buy them to ensure they’re good investments. These formulas help you determine whether a stock’s dividend and other markers are sufficient to meet your needs. Check out the company’s balance sheet, income statement, and cash flow statements for the figures you need to crunch the numbers using the following formulas. Dividend Per Share (DPS) Total Dividends ÷ Total Shares = Dividend Per Share (for the quarter) $_______________ ÷ _______________ shares = $_______________ DPS Indicated Dividend Per Share (IDS) Dividend Per Share (DPS) x 4 = Indicated Dividend Per Share $_______________ x 4 = $_______________ IDS Yield Indicated Dividend Per Share ÷ Share Price = Yield $_______________ ÷ $_______________ = _______________ % Yield Earnings Per Share (EPS) Net Profit ÷ Total Shares Outstanding = Earnings Per Share $_______________ ÷ _______________ shares = $_______________ EPS Price-to-Earnings (P/E) Ratio Share price ÷ Annual Earnings Per Share = P/E $_______________ ÷ $_______________ = _______________ P/E Payout ratio Dividends Per Share ÷ Earnings Per Share = Payout Ratio $_______________ ÷ $_______________ = _______________% Payout Ratio Net Margin Net Profit ÷ Total Revenues = Net Margin $_______________ ÷ $_______________ = _______________% Net Margin Return On Equity (ROE) Net Annual Profit ÷ Average Annual Shareholder Equity = Return On Equity $_______________ ÷ $_______________ = _______________% ROE Quick Ratio (Current Assets - Inventories) ÷ Current Liabilities = Quick Ratio ($______________- $______________ ) ÷ $______________ = ______________ Quick Ratio Debt Covering Ratio Operating Income ÷ Current Liabilities = Debt Covering Ratio $_______________ ÷ $_______________ = _______________ Debt Covering Ratio Debt-to-Equity Ratio Total Liabilities ÷ Shareholders’ Equity = Debt-to-Equity Ratio $_______________ ÷ $_______________ = _______________% Debt-to-Equity Ratio Free Cash Flow Net Cash from Operating Activities - Capital Expenditures = Free Cash Flow $_______________ - $_______________ = $_______________ Free Cash Flow

Article / Updated 03-26-2016

Simply put, the payout ratio tells you how much of the company’s profits come back to you as a dividend. You become an investor for the profits, and a dividend investor specifically because you want to pocket some of those profits now. The payout ratio shows you exactly how much of those profits actually land in your pocket. To calculate the payout ratio, divide the company’s dividends per share by the earnings per share (both can be found on the company’s income statement): Payout Ratio = Dividends per Share / Earnings per Share Use the following general guidelines to help measure how well various companies’ payout ratios stack up: Low: Anything much lower than 50 percent is cause for investigating further. Don’t automatically shun companies with low payout ratios, because they do have room to grow the size of the dividend. Many growth companies have low payout ratios because they continue to reinvest in the business; these companies offer potential for increased dividend payments as well as capital appreciation in stock price. For example, regional banks often pay out between 30 and 50 percent of their profits. But if a company with a low payout ratio isn’t growing fast, you know management can pay out more but chooses not to. Traditional: 50 percent is the traditional payout ratio, meaning the company is paying 50 percent of its profits to the shareholders in the form of dividends. Standard: 50 to 70 percent is an average range and should not generate any concern. Remember that the range may vary for some industries. Utilities, for example, sometimes pay as high as 80 percent, which is okay for that industry. High: A higher payout ratio is always better because it means more money in your pocket. However, you don’t want to see a payout ratio of 100 percent or higher. A 100 percent payout ratio means nothing is left to invest in the business. A dividend payout that exceeds the quarterly profit is a big cause for alarm and usually indicates an inevitable dividend cut. Also, a high payout ratio leaves little room for error. If most of the earnings are paid out as dividends, a big drop in earnings one quarter may lead to the company taking on debt to make the payments or an immediate dividend cut. Either way, it’s a bad sign. If a company keeps increasing its dividend, but the payout ratio remains below 50 percent, that’s a clear sign of strong earnings growth. Procter & Gamble has raised its dividend payment for nearly 60 years while paying out between 40 and 50 percent of its quarterly earnings.