One of the good aspects of dividend companies is if you divide the dividend by the stock price it equals yield. That means it is a relatively easy method to determine if the yield is better than alternatives as well as other dividend stocks. As an easier method, often people will start to use the yield as a selling point to suggest the stock is good. The reality is in the stock market, some yields are higher than others for good reasons – either the commodity price has fallen, but the company still has enough cash to pay out the existing dividend or something is happening to the company. If you see companies with higher than expected yields, it generally means more homework to ensure the risk is okay. In a column Jean-Didier Lapointe of Inovestor Inc offered some highlights with a column called Beware the risks of chasing yields. He used the service from StockPointer.

Starting the search with companies paying dividends in the S&P 500 Index.

From that list, he narrowed down to companies with a dividend yield of 2% or more.

A dividend payout ratio of 100% or greater or negative. (The dividend payout ratio is dividend per share divided by earnings per share. A negative number means dividends are fully financed by existing cash, debt or new share issue)

Negative free cash flow to capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows which could be used to stimulate growth, pay dividends, reduce debt, etc. A negative figure is a red flag.

Company                   Price     % Div                      Div                  FCF/                       Mkt Cap

$               (last 12 mon)      Payout %       Capital %                  ($ Bill)

Chevron                   96.33       4.76                      171.20              -7.9                        183.00

Bristol-Myers        66.07       2.17                       165.56             -5.2                        110.00

KraftHeinz              78.47       2.34                    -566.67              -1.2                         96.32

Occidental Pete     70.60       4.39                     -28.02             -9.50                        55.24

ConocoPhillips       41.23       6.30                     -81.67              -5.5                           52.87

Kimberly-Clark     137.49     2.77                     125.71               -0.10                       50.09

Crown Castle            88.05    3.87                     223.33              -1.10                        29.71

PG&E                          59.30    3.42                       101.11               -5.0                         29.36

Anadarko Pete         48.29   2.22                      -8.0                 -19.0                        26.11

Weyerhaeuser          31.24   4.00                    133.33                  -1.0                        24.46

Linking to dividend paying stocks, while the fact the company can pay dividends is great, the other decisions is the company profitable and generates enough cash to continue to pay dividends is why you look at these numbers. If the company is profitable and can raise its dividend, then that is even better. Understand the economy goes in cycles, but at times you can take advantage of them and then there is easy money to be made. If you believe oil prices are stabilizing and increasing, oil companies are worth looking at. If you believe KraftHeinz is paying down its debts from the merger, then it can easily be a long term hold. The important aspect is there tends to be a reason why something is away from the normal – it is not till much later do you find if it is good thing or not so good, which is why in the markets the only perfect decision is looking back. Something will happen when you look forward, you might as well get paid well you see if you are correct.

There are more questions than answers, till the next time – to raising questions.