. In investing, knowing where to invest your money is important. Well, of course, that is where your money’s future will depend. If you’re planning to build up your wealth, it’s possible that dividend stock is not your primary option since it’s usually considered boring.
But, if you think this is where you want to invest your hard-earned money to earn profit while you sleep, this can be a great idea. Dividend stocks are powerful financial tools you can use to quickly grow your investment or fund your daily expenses when wielded correctly.
Once you consider investing in dividend stocks, knowing and choosing which one can be the tricky part. Looking for which is the perfect one will take you a lot of time. However, though there’s no such thing as a perfect stock, there are some characteristics you can look out for when choosing the right one. If you have no idea what those are, here are some key traits or qualities of a well-dividend stocks.
Ideal Dividend Stocks Trait You Should Know
Dividend Stock Trait # 1: Sturdy Financial Foundation
Look at the company’s dividend payout ratio
Of course, you have to make sure that the company you’re investing in should be financially responsible, which is one thing you have to ensure. By looking at the company’s dividend payout ratio, you will be assured that the company can afford to pay the dividend they have to pay.
With this, avoid companies that are saddled with excessive debts because a company with a piled-up financial obligation can be considered a financially irresponsible company.
Companies with a lot of debt simply mean that the company’s funds are more focused on paying their debt rather than using it by committing that capital to their dividend payment programs. High interest that has to be paid together with the debt also piles up the problem, which may cause another thing that can be a problem.
A company with a lot to pay can be a sign to remove it from your list of options. Like consumers who worry about their credit rating, companies have to worry about theirs too. There are ways to check the company’s credit rating that will allow you to see if the company’s debt rate is considered an “investment grade” or not.
Consider the company’s consistency in paying their dividend
Another thing you can consider in a company with a sturdy financial foundation is if they are consistent in paying its dividend. But other than that, they should be reliable in letting them grow too! There’s no way that we can trust them with our money and somehow depend on our future in them if they do not have a plan to let our investments grow, which is their job in the first place.
We can see if a company is reliable or consistent is to look at its past performance, current conditions, and intelligent projections. It should display qualities such as continuous and consistent payment of dividends in the past few years, a good history in terms of raising its dividend most years, a sustainable payout ratio, and lastly, not being involved in any form of financial difficulties, such as debt, that may be a threat to the dividends.
When deciding to invest in a particular company, it’s a bit impossible to ask about the company’s intentions for your dividends. But if you make the right decision by investing in the right and reliable company that will provide you with a reasonable dividend payout ratio, it might help you sleep peacefully at night.
Dividend Stock Trait # 2: Steady Revenue Growth
Others think “sell more products, pay more dividends” is as easy as it sounds. However, aside from having a sturdy financial foundation, a company must have steady revenue growth since consistency in business is vital to keep the business going. This is where other companies struggle each year. Many factors affect the company’s revenue.
May it be due to the economic crisis, the number of competitors, or the virus outbreak that happened last 2020. Examples of situations like these are technology companies that have invented a bunch of applications and services offered on the web. However, due to the internet’s popularity, other competitors have also entered the web, trying to earn the way you do, making you lose your consumers.
Looking for a broader sector where you can foresee the product’s future performance might also help. Keep in mind that the behavior of a sector can change over time. Investing in the soft drink industry, for example, has historically been a safe bet.
However, since consumers at today’s time are becoming more health-conscious, most major beverage companies have shifted their focus on healthier/alternative drink options. Although, this transition will take time. Investors should know this before putting their money into beverage company names.
Accomplishing a steady revenue may take a long time, and I tell you, it is not that easy, and not everyone can continue holding onto it over time. Making sure you have invested your funds in the right company that can manage a steady revenue will be advantageous.
To make it easier for you, look for companies that sell products purchased frequently or something people can’t live without. Products that cannot be easily affected by the economy and with a firm brand name that allows them to raise their prices over time.
One company that produces products that are bought frequently is Colgate, which sells toothpaste. Since consumers have been buying and using toothpaste for generations and are not directly affected by the economy, Colgate has raised and paid its dividends for 58 consecutive years.
Dividend Stock Trait # 3: Dividend Growth
If you have no idea what dividend growth is, it distinguishes a company from “fixed income” investments like bank accounts and bonds and its capacity to increase its dividend. Companies may not increase their dividends regularly. At the same time, some raise their dividends but do not pay out much of a dividend. Suppose you want to know precisely the company’s dividend growth; you must examine dividend growth alone, separating it from the dividend’s size.
The dividend growth rate of a stock frequently mirrors the company’s earnings growth rate. That’s good because it gives you the assurance that the management will continue to pay dividends to shareholders at a steady rate of earnings.
Of course, yield and growth rate work together to determine your overall dividend return. To calculate this, simple math is used. Let’s say that on the day you buy a stock, it yields 2.5 percent. The yield on your initial investment will be 2.9% in year two, 3.3% in year three, and so forth if the corporation increases its dividend by 15% annually. In less than five years, your individual yield will double.
Additionally, if a company has a good dividend growth history, it demonstrates that the company is doing something right. However, past performance does not guarantee that it will continue to increase its dividend in the future. That gives you confidence that it will expand its dividend more than a firm that has never done so.
To identify companies that have a good dividend growth history, the company should have resisted inflation. They should have a moat or a competitive advantage. Lastly, they must have a dividend growth year after year for at least the last five years.
Dividend Stock Trait # 4: Decreased Number of Shares
The greatest investor, Warren Buffet, is fond of decreased number of outstanding shares. This is certainly a good characteristic of a well-dividend stock. Good companies that can earn and increase their profits are the ones that can generate continuous cash flow. This also allows them to repurchase their stock.
Companies usually do this. This is usually called stock buyback, whenever the price of their stocks goes less than its intrinsic value. They can also buyback it when they think the price of their current stock is attractive.
To know how this works, there are two ways:
(1) Stock repurchase increases the value of each share. This will give each shareholder a greater percentage of the company without the investor having to do anything.
(2) Decreasing the number of outstanding shares helps to boost earnings per share (EPS). As fewer shares are on the market, EPS increases.
Together with company’s number of shares, knowing the company’s Earning per Share (EPS) will also be an advantage to you. If the earnings per share increase, the company is earning and doing well. Since earning is the life of the company, which allows it to grow and survive continuously. Increasing this will be good for the company and its stakeholders, and can be a competitive advantage to its competitors.
A business that can consistently raise EPS will be able to afford to boost dividend payments to shareholders. A corporation can differentiate its goods to be much more appealing than its competitors with a great brand and business. They will be able to raise their pricing and, as a result, will boost their revenue.
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