Four Criteria for Buying an Income Stock

When an income stock is so good that I want to own it, I call it a Dividend Machine.  Below is a description of my approach to finding Dividend Machines.

Which stock should I buy? Use these four criteria.

1. Select a company that makes money; measured as EPS(earnings per share.)  
2. Select one that pays a 3 percent dividend but never greater than EPS
3. Pick a company that has increased the dividend year year for at least five years. 
4. Always select a fundamentally sound company D/E 1 or less.

Rationale:

               So many investment opportunities promise to make you money and can be very tempting but investing is risky business and you need to invest in a company that already makes money in order to reduce your investment risk.   When the investment currently makes money,you have a very good chance of getting your money back and an even better chance of reaping a gain.

               It is common sense that getting income from your investments will help your investment grow.  Just reinvesting dividends over time in the right company yields compound growth.  Young investors tend to want quick gains but you do not have to give up income to get growth or give up growth to get income. 

               Strong,consistent companies do not pay out more money in dividends than they make in earnings.  

               Growth and income are nice but you also want a company that is not going to go bankrupt.  Just like individual people,and governments, a lot of debt on the balance sheet is risky.  Balance sheets with a typical amount of debt for that industry are good.  And, sometimes you can find a company with no debt and a lot of cash and assets.

               When possible, you want to make back your investment plus your dividend income plus some kind of growth.   Growth is what makes capital gains.   You can sell covered calls against your holdings for capital gain or you can sell at a profit.

Implementation:

               You have to come up with a stock idea.  Watch the TV business shows, read the Wall Street Journal and Barrons.  Barrons lists stocks that are about to pay a dividend.  Pick one of those stocks and look at the stock quote page in Barrons. On the right side of the table, you will see estimates of future earnings.  Choose companies with increasing earnings expectations. 

           Once you select a stock in which you have an interest, use stock screening tools provided by your broker, or free sites like dividendinvestor.com or nasdaq.com or money central.msn.com or daily finance.com to find out about your company.  Dividend per share, earnings per share and growth rates are very easy to find. Although debt to equity ratio is easy to obtain, you should visit the fundamentals section to learn more about the balance sheet, dividend history, and growth history.  

 Decide what you are going to pay for the company or companies you have selected. This action is the most painful. Pay too much and you may take a while to get a capital gain.  Paying too little and maybe information about the company has not yet become public and the low stock price might suggest it is going lower.  Using the growth/income strategy you can offset this risk by earning income while you wait for the trouble to pass.   

 Charting is helpful when deciding at what price to pay for your stock.  Look at the highs and the lows and determine when to buy.

I invite you to contact me at TheMadam@themoneymadam.com if you need some help. 

Now start implementing your plan.

Very Truly Yours,

TheMoneyMadam