Show me the Dividends!

The stock market. Many a fool have lost their shirt and maybe a sock or nice belt to its ruthlessness. Others, through painstaking analysis and down right luck, have made millions. How can you beat this erratic and frustrating system? By having time on your side! When you invest in the right companies with a little bit of money and a whole bunch of time, you can earn some passive income that grows like a snowball until one day your little investment has turned into giant monthly income that can allow you to be financially free.

Saving some money and using time is the easy part. Finding solid companies that grow their dividend yearly is a different story. I've read countless blogs and books about what to look for in a company that I feel confident sharing what I've learned with my dozen or so readers. They are:

• Strong Cash Flow
• Low Dividend Payout Ratio 
• A Decent Yield
• Low debt
• Cool Name
• Dividend Growth History
• A P/E of around 15 or lower

I'll start with cash flow. Companies are in business to do one thing, make money. If a company doesn't make as much or more then it did the year before, then it's doing something wrong. They say cash is king, and they are in fact correct. Good companies pay their dividends from their cash flow. Bad Companies pay dividends from credit. When looking up a stock to purchase, look at its current and prior years cash flow. If it's steadily decreasing each year with no increases or is consistently in the red, stay clear of it. Cash flow is the first thing I check when looking for dividend stocks. It's very important.

A companies dividend payout ratio tells you if the company is making enough money to maintain its current dividend. The ratio should be between 0-70% , anything higher is not healthy. If a company has a big fat dividend and low earnings per share, then they either have to make more money or God forbid, cut their dividend. The lower the ratio, the easier it is to maintain future dividend increases, which is the heart and soul of a dividend growth strategy.  To find the ratio, divide the total dividend by the earnings per share (EPS).

                                                      Dividend/EPS= Dividend Payout Ratio

Next time I'll explain how big of a yield to look for and how a low debt ratio is important.

Comments are always welcome.