In my last post I started listing what I look for in dividend growth stocks. With a large freeze of dividend increases during the turmoil in 2008 and 2009, It's hard to find companies that actually maintained their title of "Dividend Achiever". Dividend investing is becoming more and more popular and companies are changing their strategies to attract more buy and hold investors by putting more emphasis on maintaining and increasing their dividends. That's musics to my ears! It's exciting to log on to your account and see REAL money magically deposited without doing anything at all...except making one smart decision on which company to buy.
When I look at the excellent companies to invest in, the yield is always one of the first things I see; not by choice but because it's always automatically calculated and thrown in the open for everyone to see. A high yield at first glance may seem like a good thing, but in actuality it means a stock's price is decreasing. When a stock price is decreasing the amount of money a company makes on the share is also decreasing which means the dividend it is paying out cannot be maintained. The company either has to make a lot more money, or cut it's dividend. Buying a stock just because it has a high yield will start out well, but when that dividend gets cut it's like throwing a wrench in your dividend growth machine. A low yield on the other hand may have a safe dividend, but why take a risk on an investment when you can make the same return with zero risk involved by using a GIC or high interest savings account. In addition, any profit you make at a low percentage is negated by inflation.
My general rule is to never buy anything with a yield below 4%. If a company is solid, and has decades behind them with proven dividend growth, I will buy at 3.5%. You want to make at least 10% on an investment as soon as you can, and by starting at a lower percent return, it will take a lot longer to get there and for me at 31, I want to retire as early as I can.
Debt is bad , no matter how much money you make. When a company needs to borrow money to operate, what happens when interest rates go up and sales slow down? The money they pay in dividends will most likely be used to cover the increased interest. Shazbot! When looking at a company's balance sheet, I make sure they have more then enough total assets to cover their total liabilities, otherwise I steer clear. When in doubt, always look at the cash flow, the more the better. If a company goes bankrupt, common shareholders are the last to be paid, and usually they are shit out of luck.
Join me next time when I explain what to look for in dividend growth and P/E ratios in the exciting conclusion to Show Me The Dividends!
2 comments:
Good post, keep going with your series! I understand your general rule, but you have to make some exceptions don't you? (under 4%?)
What about a stalwart like Enbridge (yielding 3.4%)?
Coca-Cola is yielding 3.3%?
Does this mean you're a bigger fan of income trusts than value stocks? Cheers.
To Financial Cents:
I decided at the start to stick to 3.5% because all good companies eventually come into that range. Right now JNJ is selling at 3.5%, it was even higher last week. What I learned since I've started investing is that corrections happen. When they do, it's time to strike with saved up dividends.
I'm still up in the air with income trusts. I'm waiting till 2011 and if certain corporations intend to raise dividends. It's all about the dividend payout ratio. Big dividends are hard to maintain.
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