Stock market experts always list a companies ability to pay dividends as one of the key things to look out for when trying to find a great investment. Up until a few years ago this had always been pretty sound advice. If a company is in a position to pay its investors dividends then you can assume that the company is making a profit and the financial forecast looks good. With the recent downturn in the economy there are far less companies paying dividends out to the stockholders and so this was not a parameter that you could use to identify an excellent investment. It’s still a tip listed on many stock market advice for dummies sites!

In 2011, it seems that things are looking a little better as more and more companies to pay the stockholders dividends. This can be seen as a sign of economic recovery as well as a sign that the company is doing well. However, do not forget that some companies choose to reinvest dividends back into the company itself and so if you’re looking at the annual reports it can be somewhat misleading. It may appear as though the company is not in a position to pay dividends but it is a great sign if a company decides to reinvest its profits back into the corporation for the development or research of the business. As the company grows, so will your investment and before you know it you will have a nice little nest egg tucked away for a rainy day.

Some companies may simply have had a bad year so is it is important to look at the dividend payout over a period of 5 years. For example, look at BP and terrible year they had in 2010 with the awful oil spill. Not only were they fined massive amounts by the US government but the public backlash resulted in a dramatic fall in the price of the stocks. The business itself is sound, the simply had a terrible year and so this must be taken into account when looking for potential investments.

As I’m sure you are away, you can use various types of tools such as automated stock trading software to help out your search for great investments. A stock screener will also help you to filter out dividend paying and non dividend paying companies.

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Filed under: Investing Software • Investment Strategy

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