Dividend stock investors took a mighty blow to their bottom line during the financial troubles of 2008 and 2009. No less than 288 companies were forced to cut their payouts during the final quarter of 2008. In 2009, there were another 804 public companies that cut dividend payments. That move cost investors around $58 billion. There are five basic things to keep in mind if you are interested in getting involved in dividend stock investing.
The most basic thing to remember is that dividend payments are never guaranteed. A board of directors will face many incentives for increasing or at least maintaining these payouts because that indicates that the company is financially sound. A financially secure company has a better chance of attracting even more investors.
Chasing high yields is not recommended. Thanks to low market yields and interest rates over the past ten years, greedy investors took more and more risk in an effort to find acceptable yields. Many of those investors paid for their greed. It is best to shy away from any company that promises a dividend yield equal to more than 2.5 times the calculated average of the overall market.
Cash flow is more important than earnings figures. It is wise to analyze the operations cash flow starting five years back. Make sure you account for capital expenditures during those years. Now look at the figures for cash dividends paid out each year. When that number is consistently lower than the cash flow figure it is a good sign that the company can comfortably pay out its current dividend.
Be selective when you are choosing firms to invest in and make sure the stocks you do select are adequately diversified. You would do well to avoid relying on ETFs and various dividend based indexes to steer you in the right direction.
You may have noticed that financial stocks have experienced more dividend cuts than other industries in the stock market. Anybody that was heavily invested in the financial sector and looking for those high yields was hit especially hard. Even a diversified portfolio was affected but less so thanks to the variety of investments.
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