I’m going to compare two completely different stocks, Deere & Company (NYSE:DE) and Nordic American Tanker Ltd (NYSE:NAT), that I bought about 3 years ago as my first endeavor into the market (Both Dividend Reinvestment Plans (DRIPs)). Deere has done marvelously tripling my investment; Nordic, on the other hand, 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 at the causes of Deere succeeding and Nordic failing?
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. Unfortunately I did not take two key steps to investigate a dividend.
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 tanker shipping industry is very volatile (dependence on oil and other shipping materials), and definitely not ideal for a safe, long term, dividend paying investment.
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 percentage of earnings are being paid out to shareholders). If I would of taken a look, NAT had a Payout Ratio in the 80s, and as the business started failing the Ratio went over 100; it’s never a good idea to be paying out more to investors than you are making. A high payout ratio with bad future earnings growth is a terrible combination
Now to the good with Deere, my best performer ever definitely will always have a place in my investing heart, but why was Deere a good investment?
Research the Industry
The agriculture 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 world’s 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.
A stock that passes both of these categories and that I am contemplating adding to my portfolio is American States Water Co (NYSE:AWR).
Research the Industry
American purchases, produces, and distributes water in California and also provides electricity in some parts. Water is something you can’t live without, and with their legend-like presence in California, I believe they have an excellent economic moat in place.
Can they actually pay that Dividend
A solid payout ratio of 45, this company likes to reward investors, but isn’t too far overboard in their payments. The stat that blows me away is that American has increased their dividend every year since 1955! If that is not consistency I don’t know what is.
Foolish Conclusion
There is always more to look at then a company’s dividend and industry when investing long-term, but they are a great place to start. Companies that reward their investors through thick and thin with dividend payouts instead of searching for that next great project in which to invest their excess cash are a step ahead of other businesses. It is hard to predict if an industry will be successful in the future, but looking at trends that will effect it (world population increasing) are always helpful. Go big or go home is not the model to live by for new investors, and evaluating these two indicators are necessary for jumping into a wild market.
The article Looking Past a Nice Dividend originally appeared on Fool.com and is written by Grant Hosticka.
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