- Dividend investing is a reliable method of wealth accumulation that offers the inflation protection bonds don’t.
- Dividend investors should seek out companies with long-term profitability and earnings growth expectations between 5% and 15%.
- Companies should boast the cash flow generation necessary to support their dividend-payment programs.
- Investors should avoid companies with debt-to-equity ratios higher than 2.00.
- Beyond studying a specific company’s fundamentals, investors should likewise educate themselves about broader sector trends to make sure their chosen companies are positioned to thrive.
potent Cash, Low Earnings Expectations
When vetting dividend-paying companies, long-run profitableness is a key retainer. Although any company can occasionally experience a profitable draw, only those that have demonstrated consistent increase on an annual footing should make the cut. specifically, investors should seek companies whose long-run earnings growth expectations range between 5 % and 15 %. But beware : companies whose growth exceeds 15 % tend to experience earnings disappointments, which about always nick the stock monetary value.
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following, investors should strive to find companies with healthy cash stream generation, which is needed to pay for those dividends .
finally, a minimal five-year track record of firm dividend payouts signals continued dividend growth. Of course, it ‘s substantive for investors to purchase their shares prior to the ex-dividend date .
Steer Away from Debt
Investors should avoid dividend-paying companies that are saddled with excessive debt. Simply put : companies with debt tend to channel their funds to paying it off rather than committing that capital to their dividend requital programs. For this reason, it ‘s imperative that investors examine a ship’s company ‘s debt-to-equity proportion. If that trope sits north of 2.00, move on.
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Check Sector Trends
While scrutinizing a company ‘s numbers is key, it ‘s no less essential to look at the broader sector, to cultivate a more holistic projection of future performance. Case in bespeak : an petroleum party may be thriving, but a dip in anoint prices is likely to spike demand while decreasing provide. This may result in breed price depreciation and decrease dividend payouts .
For another exemplar, look no further than the aging baby baby boomer population, which will inescapably skyrocket the demand for healthcare services over the following several decades. Although this doesn ’ deoxythymidine monophosphate guarantee the performance of any single healthcare provider, by and large speaking, healthcare stocks are bouncy enough to weather broader market plunges. This paves the way for steady dividend increases moving forward .
Be mindful of the fact that a sector ‘s behavior may change over clock time. For exemplar, while investing in the soft drink industry has historically been a safe bet, consumers are becoming increasingly health-conscious. consequently, most major beverage companies are migrating to the healthier/alternative drink space. But this shift will take time. Investors should recognize this before committing their hard-earned dollars to beverage company name.
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The Bottom Line
If you plan to invest in dividend stocks, look for companies that boast long-run expect earnings increase between 5 % and 15 %, strong cash flows, low debt-to-equity ratios, and industrial military capability .