Know How to Buy a Stock
While choosing a stock make sure you are in line with GUIDELINES OF DIVIDEND STOCK PORTFOLIO MANAGEMENT, described in EUDIVIDEND INVESTING SYSTEM. For that you have to consider the following metrics.
Market conditions. Do not invest when market is in clear downturn.
Diversify your portfolio by 6-8 sectors with 3-5 companies in each sector.
Pay attention to the size of company. Larger companies are preferable to smaller ones.
How To Buy: Decision Making Process
- Understand how company performed in the past
- Understand its current situation
- Evaluate how can the future of company unfold
Then apply your judgement how you see the balance of the past, current and future company states.
Is that particular combination right for you?
Is it something you are looking for?
Do you understand how company makes money?
Are you ready to share good and bad times with that company?
The above mentioned investigations are needed in order to answer those questions.
The decision you take depends on your personal attitude to risk, on the level of your experience and confidence in investing.
DGP tools greatly facilitate decision making process.
In order to investigate a particular stock, you can enter DGP stock screen and see immediately past, current and future estimates of company’s performance on the same page. You can find there DGP ratings on historical performance and price reasonableness as well as projection of possible dividend income in the future.
If you want deeper analysis of a stock, hit FUNDAMENTAL STOCK DATA tab. Comments next to each data item will help you judge how good is company’s performance in respect of that data.
In the PAST PERFORMANCE section below that fundamental data is described in detail.
As everyone knows, past performance does not guarantee future results. However, it can, at least partially, indicate how company can perform in the future.
Looking at the past performance of company make sure it is among the sector leaders. DGP ratings are helpful here. They provide insight on how well company performs in general within its sector.
However, you also could look at the company performance in detail on DGP stock screen.
If you hit FUNDAMENTAL STOCK DATA tab on DGP Stock screen you can see company specific information.
Company’s dividend yield should not be too low. If it is, a stock as dividend payer is not very useful for investor. However a dividend yield should not be too high as well. Too high yields are indication that a price of stock is very low and probably company is in trouble.
Look for dividend yield slightly higher than the sector average one.
Make sure the price of stock under consideration is not in downward trend. As an indication, price growth over the last 4 quarters should be positive.
Companies with longer periods of dividend increases are preferred. It shows company’s management commitment to dividend increases. So, it is more likely that company will continue with such a practice in the future.
Over time share price usually reflects dividend growth. So, check for consistency of price growth with dividend growth.
Look for stable payout ratios over longer periods of time. Payout ratios up to 60 % are preferred. Payout ratios above 80% are too high for majority of sectors.
EPS AND SALES GROWTH
Dividends are paid out of earnings. Earnings depend on sales of company. So, dividends are safe if company has good smooth growth of both earnings and sales in the past.
Look for companies with earnings and sales growth above sector average.
PROFIT MARGIN, RETURN ON EQUITY
These two indicators of company’s performance should be stable over time and, preferably, above a sector average.
DEBT TO EQUITY RATIO
The level of indebtedness differs by sector. Look for less indebted companies, for companies with debt to equity ratio below that of sector average.
CASH FLOW PER SHARE
Dividends are (mostly) paid out of cash. Look for company that has steady and consistent cash flow numbers.
Look through all of these indicators and decide whether company is one of the best in sector.
If you think it is a good company in terms of past performance, then check how reasonable is a stock price. It can be seen from price upside potential rating on DGP stock screen.
Stocks are rated as H (High), M (Medium) or L (Low) for price upside potential with H being for stocks with highest potential.
ESTIMATE OF THE FUTURE PERFORMANCE
This is about collecting information from company’s financial reports, analysts’ researches, articles, etc.
Company can strengthen its business by introducing new products or services, expanding geographically, increasing prices, acquiring another company or in some other way. Evaluate what tools company would use to succeed in the future.
Do not forget to consider what are the long term prospects of sector a company belongs to.