Five Key Indicators Of A Good Stock

If you are a stock investor and one of its main indicators to make the decision to buy or sell, are dividends decreed each company, these five indicators will help in making their decisions.

With interest rates still relatively low, it is difficult to find safe places to invest their money. While a certificate of deposit (CDs) may provide a safe and secure return, a 1% or 2.5%, the performance is not very exciting.

An alternative to a CD or savings account high performance are the stocks that pay dividends. Invest in stocks that pay higher dividend can provide a steady revenue stream for many years with the potential for capital gains, for the valuation of the shares over time.

There are plenty of stocks that pay dividends, however, not all are equal. For this financial indicators used to explain and share every investor should use to make their investment decisions.

The use of all or a combination of these estimates can help to filter the good and bad actions dividends.

The dividend yield (Dividend Yield)

The dividend yield (or current performance) is the most common indicator for stock investors. The current yield is calculated by dividing the value of dividends paid in the last 12 months to common shareholders on the current stock price.

For example, if a company pays $ 100 in dividends during the past 12 months and currently trading at $ 5,000 per share, the current yield would be 2% ($ 100 / $ 5,000).

While the dividend yield is an important measure has some shortcomings. First, the division uses the dividend yield product of the operation of the earlier period of the company against the current share price.

On the other hand, in financial terms this indicator does not represent the return on investment that has won appreciation of share price. In this case, the dividend yield does not represent the real total return.

In general, the dividend yield can be a useful investment tool despite its flaws.

Value of Payments (Payout Ratio)

The dividend payout ratio measures the amount of company profits are being used to pay dividends to common shareholders. This is an important relationship to an investor, providing useful information about the legitimacy of the company’s current production.

The relationship is done by dividing the company’s net profit on the total amount of dividends payable. For example, a company with high payout ratio (ie, 80%) probably will not be able to maintain this dividend on the basis of current income.

Investors must find that the dividend payout ratio around 50%, although in some years this relationship can vary, must be consistent. The long-term policies are revised to be very closely by investors because of them depends on whether the company will be well positioned to secure future growth.

Performance of the costs (Yield on Cost – YOC)

An investor must calculate this indicator depends on the price because he bought the shares. It is the amount of dividends received compared to the purchase price of the action and not on the current stock price.

The dividend yield is explained above, consists of dividing the dividend amount received on the trading price action on the Colombia Stock Exchange.

In contrast, the YOC is to divide the dividend amount received on the purchase price of the stock.

The cost performance is especially important for an investor if the stock is falling. For example, an investor can take an action that is trading at $ 5,000 per share and pays $ 200 of dividends, that means a return of 4%.

However, if the investor bought the stock at $ 6,000, the performance is not as impressive. In this case, the real yield would be 3.33%.

Price on earnings (P / E)

The price on earnings (P / E) is one of the most common financial calculations used by all investors today. The rate is calculated by taking the current stock price divided by the earnings per share for the last 12 months.

The P / E of an action may be useful to an investor who is focused on the dividend decision granting the action. In general, dividends are not used in growth stage companies, otherwise always reinvest profits in the business to generate higher growth.

Therefore, actions should have a value of P / E reasonable. No need to overpay for an action that pay good dividends. The price on earnings can help the investor to filter out stocks that are expensive.

The growth of dividends

An investor who buys stocks for the long term and have the best dividend, should not only look at where it runs the stock price. Find companies with sustained growth in dividend payments year after year is a good sign and shows a well run company. While no guarantee of future growth, the above results remain a good sign.

While there is no magic formula in the five indicators mentioned above. They all provide useful information for investors looking to maintain long-term investment and receive better returns. Each indicator has its own shortcomings and should not be used alone. The best option is to use each in its analysis and understand what the overall results they provide.