With the ever rising interest rates and bank bonds till stingy, dividend-paying stocks remain the best option for investors. However, this option is not without risk. Your earnings can get wiped out in a day when the stock price drops, something common in volatile markets.
Without warning, the company you invested in can cut dividends, therefore, pulling the rug from under your feet. The best dividend stocks are still preferable to non-payers when the waters get murky. If you love the dividend stocks, it is easy to get caught up searching for the high yield stock and end up missing the big picture of what makes an excellent dividend stock. It is actually easy finding the best dividend stocks from select dividend-paying companies with the following tips.
- Watch out for the high yield
A dividend yield is the earnings over the past 12 months divided by its current stock price. This means as the price falls, the yield will go up. Even though this could present an opportunity to buy cheap, it could also mean the company is in financial trouble and the dividend could end up being cut or wiped out completely. High yields commonly signal financial distress, and if possible, keep off such a stock. Some real estate investment trusts do have yields above 10 percent but entail a significant risk component.
- Consider its history
Companies showing a solid history of raising the dividend will be favorable to one with a shaky past. This commitment to consistently grow dividend reflects the company’s capital discipline and a strategic alignment of the management interest with that of the shareholders. Have in your list of preferred companies those which have raised dividends every year for more than ten years.
- Earnings and cash flow
The best dividend stocks are those with a healthy cash flow that supports the dividend payouts. Companies that scrap the bottom to maintain dividend payouts when the earnings fall may have a bleak future. Companies with a growing cash flow and earnings are favorable in an environment where the interest rates are rising. Since dividends are corporate earnings passed onto shareholders, the company should show a positive cash flow and growth in earnings that corresponds with the dividends. It is not that easy to manipulate cash flow and is less variable compared to earnings, therefore, making it the best indicator of a strong company worth investing in for dividends.
- Keep off the edges
The temptation to live on the edges to get superlatives is always there. Avoid the companies that just awarded high dividends or announced some special dividend. It may appear as if this is the best way to go, but it is not. Follow the traditional methods of investing and go with a company that pays out a stable dividend and has a gradual increase. The best stock to invest in for dividends is for the company that shows a consistent net cash balance, positive cash flow and has an industry-standard payout ratio.
- Watch out for growth
A successful income portfolio includes stocks with dividend growth. Stocks with a consistent growth can significantly grow your investment over time. Dividend growth plays a significant part in growing the value of an investment and should not be overlooked.
- Consider a solid foundation
Once you have done your shortlisting and are left with a few companies to vet, consider what fuels the consistent and rising dividend payouts. Companies with a solid business foundation are attractive to everyone since this means a solid financial foundation and a promising future. Those with weak business models or those which you cannot understand how they raise ash should be struck off the list of your preferred stocks. For example, if you are interested in tech companies, consider the trending technology and the movement of customers with innovation. Back companies with a stable balance sheet strength to continue with dividend payouts, this is squarely pegged to the business model.
- Income now or later
Most new investors will favor high dividend yield today and fail to see the need for growth. Investors that do not need the income today will prefer growth and consider the inflation factor. An investment that will increase the dividend at or above the inflation rate is the best since it will protect your buying power. A stock that favors growth over yield offers a more solid option to grow your portfolio compared to that which sells itself as high dividend stock without the corresponding high growth. This leaves you with the decision over maximum income now or a lower yield in return for higher growth rates.
- Remember diversification
You do not need to invest in lots of companies to achieve diversification. From the beginning of your research, pick companies from various industries of interest to avoid ending up companies in the same industry which defeat the principle of diversification. At least ten industries represented in your list makes for a well-diversified investment when you finally pick the best stocks.
- Go for a bargain
Even with the best analysis and consideration of all the financial aspects of the company, if the stock price is too high, it will still be a bad investment. Consider the price to earnings ratio, price to book value, price to cash flow, and price to sale metrics when analyzing the best dividend stocks. Find the best value metrics that mean something to you and use it to review all the companies on your list.
The market can be considered as a voting machine in the short term and a weighing machine in the long term. This means you should consider the underlying value of the business before pushing the prices too high or low. If your list has an excellent stock which seems expensive today, keep watching it, it might get to the right price in the near future. Patience is the strength of the game and if you have it then the market can belong to you.
You may consider the alternative to the best dividend-paying stocks. Investing in stocks to sell them later at a profit is attractive to some investors and makes a lot of sense. The gain is not taxed until when you sell the stock but dividends are taxed on the year they are issued. Keep an open eye and use metrics to assess the stocks and you will have the best-paying stocks in your portfolio.
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