When choosing a dividend stock, there are plenty of things to consider. Indeed, you want to carefully consider different aspects of a stock before adding it your dividend portfolio. So, while you are considering dividend yield, and P/E ratios, don’t forget, too, to consider the fundamentals of a company.
Looking at the Big Picture
It’s true that at dividend can say a lot about a company. However, a company can also have a lot to say about how likely the dividends are to remain stable, see increases, or see cuts (or elimination). Look at the big picture for a company, it’s fundamentals, to get an idea of what might be coming next for its dividends.
Fundamental analysis, when you are looking at a stock, is about more than just how the stock performs day to day. The technical aspects of the ups and downs in short-term price action don’t really figure in to fundamental analysis. Instead, the idea is to take a look at items that are likely to affect the overall stock performance over time.
Some of the factors to consider when you are looking at the fundamentals include:
- Management: Who is in charge of the company? Are the top people capable? Do they make good decisions? Has the company management been relatively stable and consistent over time? A look at the way a company is managed can be quite telling.
- Profits/earnings: Take a look at a company’s profits and earnings. This doesn’t need to be a full on analysis; simply look at the trends, and whether the company has been able to maintain decent profits over time.
- Growth potential: Does the future look reasonably bright? What’s the company’s potential for growth? In some cases, even if the growth potential for a company is relatively weak, the fact that it will see steady growth (even if it is small) can be a bonus. Take a look at where the company appears headed over time.
- Balance sheet: Also, take a look at the way the company handles its cash flow. How much money is coming in? Can the company handle its debt load? A company whose balance sheet requires constant adjustments, and that seems to show a growing debt load might be a bad call.
Why it Matters to Dividend Investing
These fundamentals can be useful in choosing dividend stocks, since they offer insight in how well a company is likely to hold up over time. Those companies expected to thrive are more likely to continue to raise dividends over time, consistently. A company in trouble, though, may need to slash or eliminate dividends. If your fundamental analysis of a company shows that it could be struggling soon, it may not be the best idea to invest. After all, if you are looking for stable cash flow from your dividends, a company with poor fundamentals may not be the way to go.
Before you decide on a course of action, make sure that you will be getting what you need from the dividend stock. Make sure the fundamentals are strong.