When looking to invest in dividend stocks we have tried to setup a system that we can follow to help select dividend investments. The first guideline is that the stock needs to have paid dividends for an extended period of time, usually at least five years. Second, the stocks dividend yield needs to be over 2%. Dividend yield is the dividend payout compared to the stocks price. For example, if a stock costs $100 dollars and yields 2.5%, then the stock would payout $2.50 annually in dividend income. Third, the stocks price to earnings (P/E) ratio needs to be under 20. P/E ratio is the stocks price compared to the companies earnings per share. The lower the P/E ratio the cheaper the stock is considered to be. The fourth parameter to look at is the payout ratio. The payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. If the payout ratio is 50% or less, the company typically will have room to continue paying out its dividend and be more likely to increase their dividend payout annually.
We are continuously working on building our dividend fund, which from now on we will call our investing for free-time (IFF) fund. We made a stock purchase in the account on 3/7/17. We bought 14.9383 shares of Target Corporation (TGT) for a total purchase price of $830. This will add $35.85 to our estimated annual income. We now own a total of 58.7101 shares of Target Corporation paying an estimated annual dividend of $140.90. Target has dropped over 13% in the last month after missing earnings estimates. We feel that the stock market typically overreacts to this kind of news, which gives us opportunities to buy at lower prices. Right now Target is trading at near it's lowest point in the past 52 weeks. The main question for the future is, how will the company react to the increasingly challenging retail environment created by the online retailers like Amazon? We will most likely add to our position when money becomes available if the stock stays in the $50 range.
