If you are considering buying a stock purely for its dividend yield, then you will want to be sure that the dividend can grow in the future. As such, it's not simply a question of picking out a high-yield stock and sticking with it in the long term. Usually, investors will want to make a qualitative analysis of the stock, and quite often, a quantitative analysis. Not least because the numbers often demonstrate the underlying trends in a company's business. With this in mind, here are three essential checks that you should make before buying a stock for its yield.
1.) Profit margin trends - This is one of the most important metrics in all of investing. The trend in profit margin tells you a lot of what you need to know about a stock. 2.) Return on equity - Return on equity (RoE) measures how much profit a company generates from its net assets. Dividends from free cash flow - Free cash flow (FCF) is what's left from earnings after working capital requirements and capital spending have been taken out.
Source: Motley Fool
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