Stock Investing Strategy: Look at Dividends
One of the “safe havens” of stock investing strategy has generally been stocks that pay dividends. But now, that whole outlook may be seeing something of a change. Today, Freddie Mac not only announced its spectacular losses for the second quarter of 2008, but also revealed that it will be cutting dividend payouts from 25 cents per share to 5 cents per share.
Ouch.
One of the things to look at in terms of stock investing strategy revolves around the kind of yield these dividend paying stocks have. If the yield seems high, it could be a sign of trouble. Smart Money points out that Freddie, along with Fannie Mae, a fellow government sponsored enterprise, both had rather high yields (13% and 12%, respectively). And we all know where those stocks are now.
Smart Money also points this out about looking for stocks that pay dividends:
Another pitfall to avoid when looking for dividend payers is forgetting that cash is king. Earnings per share don’t pay the dividend; it comes from operating cash flow. A company that consistently generates cash flow is in much better shape to fund a dividend. And don’t forget to look at the balance sheet. A company drowning in debt is going to have a harder time borrowing money to fund a dividend than one with a clean slate. Finally, don’t forget that unless Congress extends the rules, taxes on most dividends will likely go up in 2010.
Choosing companies with dividends really can be a helpful stock investing strategy. However, it is important to take a look at the fundamentals to ensure that the company is in a good place. You want to maintain your dividends, and you don’t want to choose an investment that goes the way of Bear Stearns.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
Tags: stock market, investing strategy, investing blog, stock investing,
dividends, investments, Freddie Mac
August 7th, 2008 at 10:14 am
[…] Dividend paying stocks can also be helpful. These are stocks that regularly pay out per share. In some cases, yields are high enough that you can live off the dividends. However, in times like these dividends decrease, so becoming dependent on them can be risky in and of itself. […]