Dividend Yield Strategy | Are You Holding This Key Today?
Dividend yield of your current stock portfolio will determine how successful you are as a value investor. Do you have any dividend yield strategy in placed before picking the right dividend stocks? While dividend yield strategy is suitable for any age groups of investors, it may be more important for elderly investors and retirees who are less risk adverse and looking for immediate income.
With that in mind, here are a few pointers to share with you.
1. Look for a company with a dividend history over a long period of time. A company with good fundamentals will strive to provide consistent and better dividends to reward their shareholders. If the company stops providing dividends for a year, one must quickly study their annual report to understand why it is so and need to consider if they can start liquidate this stock and go for other better dividend stocks with consistent performance.
2. Is the current dividend yield percentage (after tax deduction) at least 5-7%? A good dividend stock will create income to beat the inflation rate and reinvestments of such dividends can grow your wealth substantially over a period of time. There are many good dividend-paying stocks and I personally have vested interests in Real Estate Investment Trusts(REITs). Good REITs pay higher dividends on quarterly basis and this excites me.
3. A company which pays dividends should have lots of cash. We need to assess if the company is able to meet its short term obligation by checking its current ratio. The “current ratio” is the ratio of current assets to current liabilities. If a company’s current ratio is greater than 1, it is in a better state.
4. High dividends payout by a company does not imply that it is a good value stock to hold on for years. There could be occasions whereby a company liquidates one or some its assets to result a lump sum of gain. Therefore, it is important to compare the earnings per share and the dividends per share of your target dividend stock. You need to make sure the dividends per share is at least 30% lower than its earnings per share to ensure that dividend stock still have some working capital and cash flow to work with. Note that this consideration does not apply to REITs.
5. Select companies with an economic moat. This can be a stable cashcow product which can be offered to the world market e.g. beer, food and etc.
6. Plan your investment portfolio by diversify your dividend stocks in different sectors. This will help to minimise any stock market fluctuations.
7. Look at the dividend payouts of the company over a span period of 10 years. Is the trend flat or uptrending or downtrending? If it is downtrending, you may need to study why it is so because it could be the company is losing its competitive edge or higher operation or borrowing cost.
8. If your intended stock with good dividends and earnings has a history of stock buy backs, it will give a good signal that the company is performing very well.
In short, good dividend yield strategy allows one to build his wealth over a period of time but it is also essential to consider other factors before committing to picking or invest in stocks with high dividend yields. This will reduce your risks of buying the wrong dividend stocks and lose your money.