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.
The Valuation Worksheet approach described in a previous Classroom can be applied to a dividend yield strategy. The primary source for the per share information is the firm's annual financial reports. Corporate annual reports will include both summary and detailed financial statements, although even more detailed financial statements are available in a separate report, the 10K. Both of these reports can be requested from the company, or obtained at the SEC's website.
But it would be difficult for an investor to go through each company page by page and compare dividend yields for thousands of companies. For the beginning investor, there are other more useful sources from which you can draw your initial list of prospective candidates. An initial list of candidates can be compiled by applying various screens to a database of stocks. See the Stock Ideas area of AAII.com for screens based on the dividend-yield approach.
Continue to Step 2 »
