Searching for shares can be like searching for a needle in a haystack!
With thousands of shares to choose from, how do you know which one to choose?
Well, if it’s high yielding shares you want – it’s easy. In our previous article, we explained three different dividend ratios. We now explain how to use them to find high yield shares.
How To Identify High Dividend Stocks
The first thing to do is to select a share with a high dividend yield above 4%, ideally 5% or above. We then need to be as sure as we can be, given the information we have available, that those dividends are robust. We do this by examining the dividend cover, dividend payout ratio and other information about the nature of the company and its markets.
For example, a high dividend payout ratio tells us that the company is keen on rewarding its shareholders with dividends. Regular dividend payments at a consistent level year on year with modest increases are good whereas irregular dividends that go up and down with the irregular profits of a company are not. We are therefore looking for stable, modestly increasing profits year on year as well. Companies with a high yield % and a high dividend payout ratio will have a relatively low dividend cover but this could be okay as long as the dividend cover is say, 1.1 to 1.2 times and the company is a large stable blue chip company operating in a very stable market. Examples of such companies include utility companies (water, electricity, gas), tobacco companies, large integrated oil companies (not small oil explorers), and so on.
Now for the fun bit!
Why don’t you take a look at some shares, maybe companies you’ve heard of, and examine their dividend ratios? You’ll see some patterns for companies within a particular industry sector and differences between sectors. Some sectors are high yield sectors, others are not. Occasionally you’ll find a company that goes against the pattern for its sector. These are the interesting ones worthy of closer examination to work out if they are good or bad buys. Leave us a comment to let us know how you get on and what you discover.