How to Trade Dividend Stocks
- 1). Use dividend yield as your primary guide for trading decisions. Dividend yield is the amount of dividend divided by the current stock price. If the stock price drops while the dividend remains the same, the yield increases; if the stock price rises, the dividend yield decreases. Changes in yield therefore reflect stock price moves. A higher yield is a buy signal; a lower yield is a sell signal.
- 2). Make a list of dividend stocks to trade. Dividend yield may be the starting point of your search but you must make sure that the dividend is secure. An unusually high yield may be an indication that the dividend is in danger and about to be cut. Favor stocks with a low dividend payout ratio (the percentage of net income paid out in dividends) and higher capitalization to make sure that the company has ample resources to continue to pay the dividend.
- 3). Determine the highest and the lowest historical dividend yield for the stocks on your list based on recent history. A blue chip stock can fluctuate as much as 50 percent over a 52-week period. You want to catch those lows and highs to generate capital gains.
- 4). Buy when the dividend yield approaches the high mark.
- 5). Spread your purchases over time. You will never catch the absolute bottom so it's best to make a series of buys while your stock is in buy territory.
- 6). Sell when the dividend yield approaches the low mark and you have a worthwhile appreciation in the stock.
- 7). Use partial sells or stop sells placed right under the most recent support to lock in your gains. Because you never know how high a stock can go, move your stops up as the stock makes new highs.
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