Looking Past a Big Dividend and Mistakes
Today I'm going to compare two completely different stocks Deere & Co (DE) and Nordic American Tanker (NAT). I bought both of these stocks about 3 years ago as my first endeavor into the market (Both Dividend Reinvestment Plans (DRIP) Plans). Deere has done marvelously tripling my investment, Nordic on the other has gone in the opposite direction with about 2/3 of that investment gone. On the bright side I am in the green when putting them together. I enjoy looking back and thinking what did I do right on this one? and what did I do wrong?
We will start off with the bad, when I first stumbled upon Nordic I was amazed that a company was paying a 14% dividend yield, and it must be great for a DRIP. Unfortunatly I did not take two key steps to investigate a dividend.
Research the Industry: What i did not see with NAT was that every other similar stock in the industry was also paying a massive dividend yield. Also the oil tankers shipping industry was very volitile and definitly not ideal for a safe,long term, dividend paying investment. Very similar to REIT stocks.
Can they Actually Pay that Dividend? What I also didn't know was that NAT pretty much pays out all of their profits, which can easily be seen by looking at one key factor Payout Ratio (Basically what percent of earings are being paid out to shareholders). If I would of taken a look, NAT had a Payout Ratio in the 80's and as the buiness started failing the Ratio went over 100, never a good idea to be paying out more to investors than you are making. A high payout ratio with bad future earnings growth, a terrible combination
Now to the good with Deere, my best performer ever definitly will always have a place in my investing heart, but why was Deere a good investment?
Research the Industry: The agricuture industry has done great as of late and I feel a key reason is people need food, industries (ex: ethanol) need crops, the demand is not going to stop and will only continue to grow as the worlds populations also grows. Furthermore Deere has a great track record they have been around the block and have a solid management team.
Can they Actually Pay that Dividend? Yes, when we look at their payout ratio, a modest 20% in a stock that has growth potential is nice and gives them the opportunity to continue increasing it as the company grows.
In my future i will always use these to filters when trying to find my next dividend paying winner mistakes will be made in investing; learning from them is what will help you succed in the future.