5 Simple Steps to Collect Easy Money
Dear Penny Stock Millionaire,
Who doesn’t want to earn extra income on stocks?
High dividend stocks offer you the chance to grow your account and enjoy continuing rewards thanks to regular dividend payouts.
Because you can count on cash distributions as opposed to monitoring percentages of your portfolio, dividend stocks are generally seen as an effective and reliable way to build your account. Sounds pretty good, huh?
OK, so you’re interested. But if you want to learn how to invest in dividend stocks, what should you do next? Here are some of my tips for the next proactive steps you can take in seeking out prospective high dividend stocks:
Use a Stock Screener to Find High Dividend Stocks
If you want to seek out the top dividend stocks, you’ll need to sift through the many options that are available.
A stock screener can be immensely helpful in this regard. By cross-referencing the short list with other fundamental and technical indicators, you can begin to narrow down a list of the top dividend stocks to consider.
Consistent Profits Drive Growth
Ultimately, consistent profits drive growth, both for a company and for its dividends.
When seeking out high dividend stocks, you need to identify companies that either are profitable or that you think will be profitable.
A stock that has a higher-than-average dividend may be a bigger risk than one with a smaller dividend. So it’s your job to figure out how consistent the company is, and if it has the potential for increased profits.
If the profits are dodgy and inconsistent, the company probably isn’t a good choice, no matter how high the yield.
Avoid Companies with Excessive Debt
This falls under common sense but bears mention. If you are looking to benefit from dividends, the company needs to be making profits. A company with excessive debt isn’t a good contender.
A company’s debt level may not be immediately evident simply by virtue of how much money they earn. Determining their debt requires a little bit more digging.
You’ll want to pay attention to a section in the earnings report called “Defaults Upon Senior Securities.” Here’s what it’s all about …
In this part of the report, the SEC declares that “If there has been any material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of the registrant or any of its significant subsidiaries, identify the indebtedness and state the nature of the default.”
By poking around this section of the report, you can better suss out what their debt situation is. Some debt is normal for a large company — but if it’s a chronic condition, avoid it like the plague.
Analyze the Stock Sector
If you start filtering stocks that offer a 4% or higher yield with their dividends, chances are you’ll start to notice some trends in the types of companies offering them.
Typically, high yields are usually offered by the same usual suspects. Energy, utilities, consumer products, and real estate are common. Some sectors, like tech stocks, are uncommon.
While some might say this is a bad thing because it doesn’t invite diversification, on the other hand, it allows you to focus.
By recognizing that high dividend stocks are inherent to certain sectors, you can set your sights and research time on those specific sectors so that you can narrow down your choices in a more streamlined way.
You can also use this information to intelligently choose stocks that are not currently high dividend stocks.
For instance, if there’s a stock in a traditionally high dividend sector that has a great potential for growth, a lower dividend now might not be so bad. If you get in early, you’ll have room to grow.
Repeat after me: Earnings reports are your new BFF when you’re researching high dividend stocks.
When evaluating high dividend stocks, a thorough review of company earnings reports can better help you determine the best choices to suit your style.
Earnings reports are filed quarterly and are made public. They offer great information about the company’s overall performance and direction.
The quarterly earnings report gives you access to information like the company’s net income, net sales, earnings from operations, and the EPS (earnings per share).
The earnings report also offers up financial statements such as the income statement, balance sheet, and cash flow statement.
There’s more: The report also gives you the ability to perform a side-by-side comparison of the company’s most recent quarter versus quarters past.
The earnings report in and of itself can actually have an effect on the company’s stock price. Usually, this isn’t just because of what the company is reporting, but what they’re projecting for the future.
The report includes projections, and frequently, analysts also weigh in. This means that the earnings report is closely scrutinized not only for its reporting but for what it means for the company moving forward.
If a company doesn’t meet the earnings report projections, it can have a negative effect on the stock price. On the other hand, if it meets or exceeds them, it can have a positive effect, which can make for great stock momentum.
When should you look for an earnings report? Usually, there’s a window of time following the close of the quarter when companies release their reports; it’s called “earnings season.” Contact the company to learn when it will release its earnings report.
Be proactive! Don’t just wait for the report to come out, because you want to make sure you have an edge.
Need more guidance? In the earnings report, you can also gain insight by reviewing sections like the one called Quantitative and Qualitative Disclosures About Market Risk.
Companies are required by the SEC to share disclosures about potential market risk. This can act as guidance to things that might create volatility for the company’s stocks.
Some common disclosure methods might include:
- Information that can help determine the future cash flow, such as upcoming contracts or company events.
- Analysis of potential value loss for the company based on market changes (for example, higher or lower interest rates).
- Analysis of potential losses based on moves in the market.
This information can help you figure out some of the best- and worst-case scenarios for the company. Using this data, you’ll gain insight into potential future risk.
Before you execute a market order, be sure to figure out and consider the company’s P/E ratio.
The price-earnings ratio (P/E ratio) is a ratio that you can use to value a company. It’s calculated by measuring the current share price against its earnings per share.
This ratio helps you determine the dollar amount you need to invest in a given company to receive a dollar of their earnings.
Generally, a high P/E ratio is seen as a good thing. Many growth stocks are characterized by a high P/E Ratio due to the expectation that the company will be growing at a fast rate.
To calculate the P/E ratio, simply divide the market value per share by the earnings per share. Boom. Done.
Technical Analysis and Chart Patterns
Before investing in high dividend stocks, bring all of your research elements together by performing thorough technical analysis and reviewing stock patterns.
You already know this if you’re a frequent reader of this blog, but there are two key types of stock analysis.
One is fundamental analysis, which is where you research the business that is offering the stock.
Reviewing the earnings report is part of your fundamental research, but you should also round it out by doing some fact checking and reviewing press releases or news regarding the company.
Fundamental analysis is extremely important. But ultimately, what will prove your hypothesis about a company is the cold, hard facts. This is where the second type, technical analysis, comes into play.
To perform technical analysis, you’ll use a trading platform to comb over a stock’s specific price action over time. By looking at how a stock has performed in the past, you can get a good picture of how it might perform in the future.
If you look at a stock’s chart over time and see patterns emerging, this can be a very positive sign that they will repeat again.
This data-based approach can help you look at potential trades from place of fact-based knowledge versus a gut feeling.
Develop Your Own High Dividend Stock Watchlist
Your time is valuable, so you shouldn’t waste your energy on stocks that aren’t worth your consideration.
But how can you make a short list of high dividend stocks to watch and monitor so that you can pounce on them when the time is right?
That’s easy: Make a watchlist, or a short list of potential high dividend stocks that you’re considering trading.
This list is composed of stocks that you’ve deemed worthy of your consideration. You keep a watchful eye on these stocks to see if they meet certain criteria that will make you want to enter a trader.
Often, you’ll be looking at things like volume, breakouts or breakdowns, or any change in the moving average.
Obviously, if you want to trade high dividend stocks, your watchlist should be composed of high dividend stocks. So how do you go about it?
Everyone ultimately develops their own technique for making a watchlist, but here’s a suggestion for how you can get started …
First, narrow down your choices. Start by filtering on high dividend stocks, perhaps in a particular sector you’ve decided to focus on.
Next, look at trading volume. My star student Tim Grittani looks for stocks that are up 10 percent or more, with at a volume of at least 300 thousand shares.
From this point, you’ve narrowed it down to a watchlist. You can monitor all or some of the ones on your list, really digging into their earnings reports and performing detailed technical analysis.
Are there any evident patterns, or is there some sort of a catalyst that looks promising?
Once you’ve narrowed down your watchlist, you’ll at this point have a few strong contenders for a trade. From here, it’s a matter of watching and waiting.
Keep a spreadsheet for your watchlist so that you can track the stocks in question. Review them frequently so that you don’t miss any important moves. This way, when opportunity presents itself, you’ll be ready.
Is a stock worthy of your watchlist? Here are some things to ask yourself:
- Does it meet my criteria?
- Have I had success with this pattern before?
- Is there enough volatility?
- What direction is the stock moving?
- Is it liquid?
The Bottom Line
Dividend stocks have long been part of the trader’s repertoire, with reliable payouts that can help fund new investments. High dividend stocks allow you to take advantage of the benefits of dividends but at an accelerated rate.
However, like any other high-reward trading method, it comes with a heightened level of risk. This makes it all the more important to perform fundamental and technical research and to carefully review the options before executing market orders.
Editor, Penny Stock Millionaires