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BASICS

Dividend yield

 

What you need to know

Earnings

Price-earnings ratio

Dividend yield

Book value

Return on equity

Debt-equity ratio

Price volatility

More clues to value in a stock

Value Sign #3: Look for a pattern of rising dividends supported by rising earnings, and look for a dividend yield in the neighborhood of 3% or 4% to generate income to reinvest in the company.

This is the companyís dividend expressed as a percentage of the share price.

If a share of stock is selling for $30 and the company pays $2 a year in dividends, its yield is 6.7%.

In addition to generating income for shareholders, dividends are a good indicator of the strength of a company compared with its competitors.

A long history of rising dividends is evidence of a strong company that manages to maintain payouts in good times and bad. Even better is a company with a history of rising dividends and rising earnings per share to match.

A stockís current dividend payout and yield are included in the daily stock listings in the newspaper. For historical information, the S&P Stock Guide and Value Line are excellent sources, as are the stock databases of the online services.

Analystsí dividend forecasts play an important role in creating expectations for a stockís future performance. If analysts expected the $30 stock mentioned above to raise its quarterly dividend to 55 cents, its price might creep upward in anticipation of the increase. Then, if the companyís profits rose only enough to permit it to pay 52 cents per share, disappointed investors might sell, thus causing the stockís price to fall even though profits and dividends rose!

Sometimes the opposite can happen. Shortly after the death of its elderly founder, Armand Hammer, Occidental Petroleum announced a dividend cut and its price quickly rose. Analysts deemed the move (which was part of a larger plan to close down some unprofitable operations and write off debts) a smart step toward a stronger company in the future. Thus, a dividend cut isnít always a sign of weakness in a company. Itís important to know whatís behind it.

Although occasionally dividends are paid in the form of additional shares of stock, they are usually paid in cash; you get the checks in the mail and spend the money as you please. Many companies encourage you to reinvest your dividends automatically in additional shares of the companyís stock and have set up programs that make it easy to do. Such arrangements, called dividend reinvestment plans, or DRIPs, are described later in this chapter.

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Price-earnings ratio   Book value

 
 



 
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