Posted by: Ben Steverman on March 12, 2008
My article, “Dividends: The Sweet Spot,” was published on Businessweek.com today. In it, I explore opportunities to buy stocks that also offer healthy dividend yields.
Some advice for the dividend-hunting investor didn’t make it in the final article — namely some interesting thoughts from Dan Genter of RNC Genter Capital Management. He and his firm stick to guidelines when they buy dividend stocks.
1. If you’re buying a stock for its dividend, look closely at the company’s financials just like a bondholder would.
2. Look at the “integrity of [the firm’s] dividend policy.” You especially want a consistent payout over the last five years.
3. If you’re really serious about dividends, stick to dividend yields of 2.5% or more. If you accept lower yields on some stocks, Genter thinks you’re more likely to try to make up for it on other stocks. This could compromise your standards, causing you to take higher risks to get higher yields.
4. Stick to companies with a market capitalization of $3 billion or more. Smaller firms are more vulnerable to economic conditions.
5. “You really have to watch that payout ratio,” Genter says. The payout ratio is the percentage of earnings that are paid out in dividends. Don’t buy any companies with a payout ratio over 60% — that’s a sign the firm is sending too much cash to shareholders. A payout ratio of 80% or 90% is unlikely to be sustainable.