To make sure an income stock you are considering can continue to raise its dividend, you should determine that the company is financially strong. You can do this by analyzing the company’s debt. Debt that is more than 50 percent of the company’s equity may be a sign of trouble. Another quick way to gauge financial strength is to check the stock’s rating with a reputable credit rating agency’s ratings, such as Standard & Poor’s Stock Guide. Any rating over B+ means that the company is financially solid.
The final ratio to inspect before you buy a stock for income is the payout ratio, the percentage of earnings that is paid out in dividends. A payout ratio below 60 percent means that there is a sizable cushion for the company to fall back on before it has to cut its dividend. A low ratio also leaves room for the dividend to grow.
On the other hand, a payout ratio above 60 percent might be a sign that the dividend may be cut. Don’t be entranced by a stock that sports an above-average yield, usually of more than 10 percent. There must be a reason why the yield is that high, and probably it is not positive.
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As a shareholder, you are also entitled to receive quarterly updates on how your company is doing. You will be mailed a report that tells you whether profits were up or down and what other major corporate developments occurred in the last three months. You will also get a more detailed annual report outlining how the numbers for the latest year compare with prior years, as well as the company’s plan for the future. You will also be invited to vote at the firm’s annual meeting, either in person at the meeting or by a mail proxy ballot. You will vote on important matters, such as whether a major acquisition should be completed. At most companies, you get one vote for every share you own. So unless you own an enormous number of shares, you shouldn’t expect to have much influence over the company’s strategic direction. For the most part, you are along for the ride while the professionals running the company do their best to maximize profits.
In addition to the profit potential from a rising share price, you can earn money from stocks by collecting dividends. If the corporation is profitable and the board of directors decides it is prudent, the firm will send you a quarterly check for your piece of the profits, known as a dividend. Dividends are normally paid by large, well-established companies that are sure they will achieve a certain level of profit each year. Smaller and newer firms usually do not pay dividends because they want to reinvest all of their profits back in the business to make it grow faster.
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