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Dividend growth investing guide
Dividend Investing is one of the purest forms of investing.
where you get income from the invested asset (company)
The popularity of Dividend Investing has been steadily rising for a few years now.
Some even consider dividend investing for regular income.
Why dividends investing make sense?
There are even investors, who will not consider buying any stocks just because the company doesn’t pay a dividend.
The beauty of dividend growth investing is that longer you hold the stock safer it becomes.
let me tell you how
In a very simple example
suppose you make an investment of $1000 and bought 100 shares for $10 of company ABC company Inc.
now if the company declares a dividend of $ 1,
you already got $100 back to your bank account.
you are now the effective market risk is now down to $900 only.
Investing in simple term is ” how soon I will get my money back and still own the asset”
it will be safe to say that there is now only the remaining $900 is subject to market returns since you got back $100 already.
- A company can artificially post inflated quarterly profits but they can’t fake dividends.
- Dividends yield increases as stock prices fall, which makes stock prices more attractive for other buyers.
- It generates regular cash flow for the investor.
How to find a good dividend growth stock?
First thing first check the Balance sheet
Only a powerful Balance sheet can allow regular dividends. The company should be more than capable to meet all the obligations of bondholders, banks, suppliers and even the IRS. Because in order to pay dividends, there should be money left with the company. A quick way to look at it to see check the “Liquidity Ratios” such as, Acid-test ratio and current ratio, which is higher the better. companies with a powerful balance sheet can withstand unfavorable times such as recession etc.
If you have invested $10,000 in Coca-Cola in 1962 you would have got back more than $2.5 million including dividends in 2019.
and the best part is you don’t have to do work hard that kind of money, let the time and your company working for you.
A growing business can mean growing dividends
Growth is probably the only reason for investing the equity rather than fixed income although fixed-income investments offer a fixed return, it is only when interest rates keep declining fixed-income investments such as bonds that offer the potential for capital gains potential profit growth.
However, young fast-growing companies seldom pay dividends. For dividend investing you should usually look for slow grower/sluggards.
These companies usually steadily grow at 4- 12 %, generally, give a very good dividend (about 4-6%) and are a good asset during the recession. Idea is to find the companies that steadily growing without external factors like wars, elections and rising interest rates do not affect them. When it comes to dividends legendary fund manager Peter Lynch relied on these sluggards in his whole career.
Dividend yield Pattern
Don’t just look for dividend yield, look for its pattern. Not everybody is Warren Buffett and doesn’t have a holding period of 80+ years.
in theory higher the dividend yield increasing the more attractive is the stock prices.
however, if the dividend yield is increasing for some time, the company may be experiencing some unfavorable factors
if those unfavorable factors are short term in nature can be solved in the short to medium future (here skills of management comes into play)
The next step to check it’s intrinsic value, if the current price is
below its fair value then it is a bargain.
So check it’s dividend history for the yield pattern is it increasing or decreasing?
- insider ownership is going down
- a sudden increase in depreciation to pump profit
- a sudden decrease in depreciation
- not so good management history
Few more portfolio tips
- It doesn’t need necessarily to be Broadly diversified
- Dividend investing work in long term
- look for Great business with a large business franchise or moats
- Dividends can be re-invested for even more profits
If the company is not making money then, how will you make money as a shareholder?
To sum up Warren Buffet once said
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Investing in Great businesses for the long term has several advantages.
Above all, it allows truly Great businesses to compound your investment year after years.
In addition, Your risk keeps on decreasing with time,
Because you receive a portion of your money back as dividends.
it’s for you to decide if you want to re-invest the dividends which ideally you should.
or, just enjoy the regular income
All in all, You Should Seriously Consider investing in dividend stocks portfolio.