Parameters To Determine The Stocks To Invest In – Are They The Best Dividend Paying Stocks?
Interest on bank deposits or shares of stocks – which will yield higher ROI (Return On Investment)? The low interest rate pegged by banks on deposits prompts people to explore other avenues of investments. Those who are market players invest on shares of stocks and many would bet their money on best dividend paying stocks. If you are new in this venture, would you invest without knowing the ins and outs of stock market? Or would you just invest also on best dividend paying stocks?
The stock market is indeed a good business – that is if you know how to play with market trends. There are two types of investors in the stock market – those who buy stocks and sell when the price appreciates and there are those who invest because of the dividends paid on the stocks. These are the two ways by which you can profit from this venture. Many became millionaires because of the stock market but many also turned penniless because of their poor foresight in the stock market game.
If you are contemplating on investing in the stock market, it is best to know first the basics. What stocks are worth buying and why?
You are investing on stocks rather than depositing in the bank because the earnings are higher. We call the income – dividends. When you buy shares of stocks of a company, you become a part owner of the business and as such, you share in the income of the company. Dividends are the payments made by a business (corporation) to its shareholders, this is the income.
Criteria for choosing the share of stocks to invest in –
- Dividend yield – Expressed in percentage, this is calculated by dividing the amount of dividend by the current market price of the share of stock. As an example, if the dividend is $5.00 and the current price of the share of stock is $50.00, the yield is 10%. If the price of stock drops to $40.00, the yield is 12.5%; when it goes up to $60.00, the yield is 8.33%. So – the dividend yield is inversely proportional to price.
- Size and capitalization – This could be another basis of choice of the stocks to invest in. Some investors will buy stocks of big companies, maybe because of stability and capability to survive economic down trends. The capitalization is also an indicator of the liquidity of the company.
- Profitability – This is a measure of the efficiency of the company – how well it uses its assets to produce income. The gauge to measure profitability is Return on Equity which is a quotient of net income divided by stockholders equity.
- Low debt – This parameter is measured by debt to equity ratio. This is computed by dividing total debt to stockholders equity. Market players would not invest on companies with zero ratio because this is an indication of the company’s poor credit standing. A too high ratio will also shy away stock investors because high debt is tantamount to losses of the company.
- Smart money – Try to look into the big investors in a company, it is good to buy shares of stocks with institutional ownership. These institutions know better on the standing of the company so you can follow suit.
- Price action – This indicates the volatility of the share of stocks. If the price per share is on the downward trend, then it is not a good indication. It means that very few buy the stocks or many investors are disposing their shares.
Best dividend paying stocks are desirable investments but as an investor, this should not be the only parameter in the choice. Any new stock market investor has first to know his goal – is he the buy and sell type of investor or is he the investor for dividend payments.