Choose the right friends

Valuing a stock is like choosing your friends. You have certain qualities you’re looking for and you know what you want to get out of the friendship.

But before you buy a stock and enter the friend zone, you should ask some further questions. Is the friendship, or investment, aligned with your financial objectives and have you completed all the necessary homework or background checks.

Here’s a breakdown of how to identify when a company becomes part of your inner investment circle.

OBSESSED WITH INCOME

Australians love their dividends. As a result of this, or perhaps because of it, many Australian companies pay good dividends, usually twice a year.

Calculating a dividend payout ratio is the typical way investors gauge how friendly a company is towards dividends. There are a few ways to do it, but the most common is to divide the total dividends paid by the company’s net income or its earnings per share. The higher the ratio, the more dividend “friendly” the company is.

However, investing for dividend yield can blind your view of a stock’s quality. Paying out dividends is not an obligation, unlike a bond coupon