I recently shared my stock trading analysis template along with my recent moves on the stock market. Today, I’ll be sharing my list of 15 things I look at before trading stocks. Numbers are obviously a big part of it. However, there are several other considerations before buying a dividend stock:
15 Things To Look at Before Trading
#1 Dividend Yield
Since I want to build a dividend portfolio, I look at the dividend yield as one of my first criteria. If the dividend yield is below 3%, it’s taken off my stock radar. Why is that? I wouldn’t be so picky in a different trading environment but I think that there are too many great opportunities on stocks offering more than 3% dividend yield. So, I decided to ignore the other tickers.
#2 Dividend Payout Ratio
A high dividend yield is good. A low dividend payout ratio is better. The one thing you want when buying a dividend stock is to see a consistent dividend payout in the future. This is why a low dividend ratio is great. I like when it’s below 50% but I will make exceptions (up to 80%) depending on the other factors.
#3 Dividend Growth
This is definitely the key behind dividend investing: holding the stock long enough to see the dividend grow to a ridiculously high yield. People who bought Canadian banks in 2009 didn’t have to wait long to see 8 to 12% dividend yield on their investment… This was a crazy opportunity! Too bad that I missed it…
#4 Sales Growth
Another interesting factor is to look at how the company is growing. I’m not too eager to see huge numbers but I certainly want to have something solid and consistent. Depending on the industry, this may vary between 5 to 200% ;-). Mind you, I would stay away from 200% growth… those stocks are usually overrated by the time they reach that level and you are just surfing on speculation if you jump on the train at that time…
#5 Earnings Growth
Same here; climbing sales is good, making more money is obviously better. More money for the company means more money for the shareholders.
#6 P/E Ratio
This data really depends on the industry you are looking at. For Example, you won’t treat a high P/E ratio for a company like APPL or RIM as you would treat the same ratio for JNJ or CVX. I obviously like low P/E ratio as it gives a great indication that if the company does a little better than expected, there are great chances to see the stock on the rise.
While this won’t be the deciding factor in my analysis, I love to match the stock trend with its 200 days moving average. The reasoning behind it is that it gives you an indication of how the market sees the stock. Then, you have a better idea if the stock will continue to rise or fall in the upcoming months. If you believe in the stock and you buy it in the downfall, you will know that it might go down even lower. So no surprise for you!
#8 Company’s Industry
As you may notice already, I always look into how specific sectors do on the stock market. This is also related to stock market trends. Since there is an important psychological factor while trading stocks, I think it’s important to take a look at the sector.
#9 Sustainability & Ethics
Since my socially responsible investing series, I am more sensitive to sustainable business models and management ethics. I am not naïve and I know that we can’t be aware of everything. However, investing in socially responsible companies is definitely a good move over the long term.
#10 Management Team
Are people going crazy? Is there a current management crisis? The best example I can pull out right now is the unexpected leave of Steve Jobs, CEO of Apple. Since he was the man who brought Apple back as a leader in the industry, some investors are panicking since he has gone on sick leave. Someone can’t change a company by itself (Microsoft is still going well even without Bill Gates) but it surely influence its direction.
#11 Company’s strengths
You need to be able to establish a company’s strengths before buying it. This is how you will know if the corporation will be able to face a crisis and seize opportunities.
#12 Company’s future opportunities
Speaking of which, knowing where the company is heading gives you an indication of its future growth. When I think of cigarette makers for example, I’m not too sure where they are heading. They are currently betting on developing emerging markets while North Americans are trying to stop smoking… weird business model…
#13 Company’s weaknesses
While it’s important to know where you are strong, knowing where you are weak is crucial. You can then assess potential risks and see how the company can cope with its flaws.
#14 Company’s future threats
Looking at the past (numbers) is good, looking at the present is important, but looking at what is coming up next is very important. When I did the LLY analysis, I noticed that most of their patents were expiring soon while their pipeline is not that interesting. Things could go sour in a few years…
#15 Understanding the business
There was one a very wise man that said: If you can’t understand in what you are investing, forget about it. Warren Buffet’s investing lessons should be engraved on the computer you use to make trades. If you don’t understand the industry or how the company is making its profits; just forget about it and pick another one.
I’m sure you have some points to add to the list
I didn’t want to build a huge list so I left a few points uncovered. I wanted to know what are the factors you consider before buy stocks?
Disclaimer: I do hold positions in RIM, JNJ and CVX.
Excellent list. I also look at long term history. Some of your items relate to history, but mainly short term. I know history does not guarantee the future! But, look at the 15 years of CNR for example. Enbridge is another one I like, follow and own. Go back to its “57 year” history of dividends.
Thanks Mike. I’ll add this to my toolset for stock selection.
Long time reader, can’t believe this is my first post! I’ve been reading your blog as a dividend investor with great interest. Relatively new to this type of investing.
I have a question: I’ve read that if the dividend yield is *too* high, it may be just a sign that the stock price is in decline. At what point do you feel that it is too high, and may not be a good idea to hold onto it?
Glad you decided to write a comment ;-D
There are 2 explanations when you have a higher dividend yield:
– the company raised their dividend payout
– the company stock droped
If the company raises its dividend payout, investors will be more interested in buying this stocks and the dividend yield should not raise too much (because the price of the stock will rise accordingly).
If investors beleive the company won’t meet the market’s expectations (in term of sales, revenues, profit, etc), they might start selling it and push the stock value down.
Currently if you find stocks with a dividend yield over 4.5%, I would pass this stocks through this list of 15 things to check before buying a stock. You will probably find your answer why the dividend yield is so high.
remember a simple rule when investing; there is no free lunch in finance.
Thanks for the response. Great advice. One of the first things I learned is to not chase after high yields. Passing stocks through your list is a great way to filter out what you shouldn’t invest in.
I don’t know if you had a chance to read Derek Foster’s latest book, but he lists all his favorite blue-chip stocks that have a great dividend track record.
Echoing Mike’s statement, same thing here…while high yields are great for drawing in new customers, in the long run, the tortoise wins the race, and a lengthy, but steady pace is truly the road to success.
Those are all good things to look for before buying a stock. When I first started investing, I used to not look at the long term trend. That really ended up hurting me. Good info.
Very nice list! One thing I look for is the inherent risk a sector has. offshore drilling/BP is a good example. Pharma companies always have the risk of lawsuits.
PEG is another metric I look at.
Thanks for the tip. Have you backtested your 15 criterias? How did it perform?
Very nice and clear write up. I was not even aware of the Dividend Payout Ratio before reading your post, and now I see how important it is!