What is there to look for in a dividend stock? It’s important to remember that past dividends are not guarantees of payments in the future – if you want to be able to rely on a company’s dividend for an extended period of time, make sure the company can support it through its profitability or sources of liquidity. The current ratio, or current assets divided by current liabilities, is a popular gauge for a company’s liquidity, with ratios above 3 considered healthy.
Another consideration, as with any stock, is whether it is fairly priced. One idea is to consider a company’s ratio of levered free cash flow/enterprise value, with higher ratios indicating the possibility that the stock is undervalued. Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares.
Source: Kapitall
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