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How to select Good Dividend Stock

|Includes: Empresa Nacional de Electricidad (EOC), MSFT, PTR, TSM, XOM brings you great research through proven techniques. Out 12 point stock ranking criterial is highly effective in filtering the right stock.

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Dividend and Dividend yields can be very tempting factors to buy stocks. In this article, we provide share some wise stockJupiter thoughts on dividend. In summary, this article highlights why dividend yield and dividends received are not good indicators of good dividend paying stocks. The article provides key factors one should look for before buying a great dividend paying stock. Additionally, the article also takes a look at ADR stocks and treatment of dividends.

We all know that companies pay dividend to share their profits with the shareholders. For investors, it is a tangible return as long as they hold the stock. There are a few terms we must be aware of here before going further.

Dividend Yield - is the measure of annual dividend company pays as a percentage of the share value. Many blue chips and utility stocks have a record of paying high dividend yields. One should not purchase stocks purely for their dividend yields. Research says, earnings should be at least 1.5 times the dividend paid.

Dividend Payout Ratio - is the percentage of earnings a company pays out to its shareholders in dividends.

Dividend paying companies are seen to keep dividends stable and the street interprets dividend stability as stability of their earnings.
How about if the company's earning increases? - It does not always result in a dividend increase by the company. Good companies increase their dividends as their earnings increase and importantly, aim for a consistent increase year over year.

How about if the company's earning decreases? - Companies maintain their dividend payout, as any revision down implies serious financial troubles.
 Since, there is no direct correlation between dividends and earnings, dividend and dividend yield numbers alone are not good 'buy' indicators. However, as mentioned above, earnings growth, dividend paid as a percentage of earnings and consistent record of dividend payments should be carefully studied to filter good dividend paying companies.
One could also go an additional mile by looking at the cash flow statements of these companies. One good question to ask here is, what are the sources of cash? Increasing debt or sale of assets or income from operations. If there is a sharp decline in earnings and growth of sales and the company issued dividends from new debt or by sale of asset, it is generally not a good sign and should be avoided. Bottom-line, you must look out for companies that have sufficient earnings to distribute huge yields.
ADR and Dividend payout - The U.S. has many income tax treaties with foreign countries that provide a reduced rate of income tax (i.e., 15%)withholding on dividends paid to U.S. resident shareholders. The tax rates can go upto 30% for dividend earned in countries with which US has not signed a treaty. This page provides links to tax treaties between the United States and particular countries. For further information on tax treaties refer also to the Treasury Department's Tax Treaty Documents page.

While calculating the dividend yield from a foreign company, one should consider the tax implications and dollar trend.
A quick thought on the dollar trend with an example
Let us say, two years ago, one dollar can purchase 100 units of foreign local currency. If the dollar weakened in the past 2 years, one dollar will now purchase less units of foreign currency, let us say 50 units.
If you purchased a stock 2 years ago that pays consistent dividend of 500 units of local currency, then two years ago your dividend earnings would have been $5. After the weakening of dollar, the same earnings will now be $10. Conversely, when dollar strengthens, the ADR dividend would decrease.

A quick preview of top 5

Company Sector Industry Div Yield  Ann. Div Market Value ($MM) Net Profit Margin  Payout Ratio 
EOC Empresa Nacional de Electricidad  Utilities Electric Utilities 1.66%             0.86 423785 30.80%               0.37
XOM Exxon Mobil Corporation Energy Oil & Gas Operations 2.52%             1.68 316169 7.40%               0.38
TSM Taiwan Semiconductor Mfg. Co. Ltd.  Technology Semiconductors 3.58%             0.36 257755 21.40%               0.60
MSFT Microsoft Corporation Technology Software & Programming 1.82%             0.52 251098 24.50%               0.34
PTR PetroChina Company Limited  Energy Oil & Gas - Integrated 2.77%             3.23 213366 12.30%               0.64

StockJupiter team