Evaluating Dividend-Paying Stocks

Step 1: Where Can I Locate Dividend-Paying Stocks That May Be Undervalued?

Evaluating Dividend Paying Stocks Splash image

The simplified approach can be applied to various investment strategies using the basic sources of information identified earlier. One popular strategy focuses on dividend yield. A dividend-yield strategy can help you find potentially undervalued stocks with low downside risk, provided the dividend is secure and expected to grow, and the firm is financially sound. This strategy will also tend to produce more income in the form of dividends, and less in the form of capital gains, than other strategies.

Sources of information for financial statement and ratio analysis are presented in the "Collecting Data on a Stock" section of this Investor Classroom. These sources provide thorough, consistent and easy-to-compare information. But it would be difficult for an investor to go through each company page by page and compare dividend yields for thousands of companies.

Classroom Steps

For the beginning investor, there are other more useful sources from which you can draw your initial list of prospective candidates; a suggested list is presented in Table 1. For computer users, an initial list of candidates can be compiled by applying various screens to a database of stocks. See the Stock Screens area of AAII.com for screens based on the dividend-yield approach.

Table 1. Drawing Up an Initial List: Sources of Information

Continue to Step 2 »

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