One way to start investing money is to start buying top dividend paying stocks and then hanging onto them over the long term. The idea behind this strategy is to hold onto these investments and benefit from the cash flow that they pay you.
Dividend investing can work very well when the company behind the stock is a strong company and worth the investment. That way the stock can grow over time while at the same time paying out the dividend.
Dividend investing becomes a bad idea, however, if the stocks are only bought for their dividends. Not every company that pays out a dividend is worth the investment. In fact many stocks yielding high dividends are actually bad investments.
Some companies which have poor fundamentals and are having a hard time getting investors will actually raise their dividend even if they are not making any money. The idea is to get more investors to put money into the company and use that money to hopefully bail themselves out of a bad situation.
This can be a good idea for the business owners, but for the investors it is a very bad deal. If a company is not making money and is not profitable throwing more money at the problem will usually not fix it. The underlying fundamentals of a company should be strong with or without the extra money.
To avoid getting into a company that is not making money and may indeed go bankrupt you can check the fundamentals beforehand. Investors can do this by combining together many different fundamental indicators such as the PE ratio.
So, what is the P/E ratio? The ratio is a good indicator of how fairly priced the stock is when it is compared to the company’s earnings. The formula is pretty easy to understand, (price of stock)/(earnings per share). The lower the ratio is the better.
It can be a great way to get some insight on the company’s fundamentals, but it is only one indicator of the company’s strength. Investors should combine multiple studies to get a good idea of how strong a company is.
