It is very important to do stock analysis before buying dividend stocks. Stock analysis can help you to understand dividend yield on stocks. Basically, dividends can easily be cut by issuing companies and yields on the other hand can change quickly. In addition to doing stock analysis, therefore, you also need to know how dividend yields are calculated before buying. Generally, dividend yields tell investors how much income they will receive relative to the stock price. Buying a stock with high dividend yields can offer great source of income for an investor. But if the investor is not careful, such a move can get them into deep trouble.
It is worth mentioning that a company does not have to pay any dividend to its shareholders. A company always faces trouble when it lowers the dividend it was offering consistently. This move will actually be anticipated by the market, which will cause the company’s dividend stocks price to drop significantly before the announcement of lowering the dividend is made. Because the share price will drop, when an investor looks at dividend yields supported by the previous dividend paid by the company, the yield will be high. If the investor buys the stock based on this high dividend yield, the investor will be in line for a huge surprise if the dividend is lowered or eliminated by the company.
If you want to be successful at dividend investing, the most important step is to understand the relationship between dividend yield and share price. This also means you must know how dividend yield is calculated. For example, assume that you have bought a company’s stock for $5.00 per share. This stock pays a small dividend of $0.05 per quarter. This means for each share invested, you will get $0.20 per year. The dividend yield on the stock is therefore 4% ($0.20 divide by $5).