New in­vestors, check on debt, div­i­dends

USA TODAY Weekend Extra - - PERSONAL FINANCE - Matthew Frankel

Ques­tion: After years of in­vest­ing in mu­tual funds, I’m fi­nally go­ing to start buy­ing in­di­vid­ual stocks. What are some red flags that would sug­gest a stock is a bad in­vest­ment?

An­swer: While there are few 100% ac­cu­rate in­di­ca­tors that a stock is a bad in­vest­ment, there are some things be­gin­ning in­vestors should gen­er­ally stay away from.

First, be wary of any stocks whose div­i­dend yield looks too good to be true. For ex­am­ple, if most stocks in an in­dus­try pay 3% to 4% div­i­dend yields, a stock in the same in­dus­try that pays 8% might be a div­i­dend yield trap.

Sim­i­larly, avoid stocks that have cut their div­i­dends in the past few years. Gen­er­ally speak­ing, this is a sign of in­sta­bil­ity in a com­pany.

It’s also a smart idea to stay away from stocks trad­ing for less than $5. Not all low-priced stocks are trou­ble, but this area cer­tainly tends to have more scams and dis­tressed com­pa­nies.

Steer clear of com­pa­nies with lots of debt. The def­i­ni­tion of an ap­pro­pri­ate debt level is in­dus­try-spe­cific, so com­par­ing debt met­rics such as a com­pany’s debt-to-eq­uity ra­tio with oth­ers in its in­dus­try can help you iden­tify these.

Fi­nally, avoid in­vest­ing in com­pa­nies with fall­ing rev­enue, un­less there’s a good rea­son for it.

If sales are fall­ing, it can be an in­di­ca­tor of se­ri­ous prob­lems with a com­pany’s busi­ness model or with the en­tire in­dus­try (think de­part­ment stores such as Sears or J.C. Pen­ney).

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