When investing in dividend stocks, one needs to carefully observe the subjective and objective criteria associated with the various shares. This will ensure that you get your desired cash flow. Here is a list of factors that you need to consider.
Basically, there are industries that tend to have higher yielding dividend stocks. If you choose to invest in the telecommunication or commodity industry, the dividend yield there is average. However, investing in industries, such as real estate and master limited partnerships, could mean higher yields.
The real estate industry is required by the law to payout 90% profits to their shareholders. Therefore, the yields are always high in this industry. Another thing, this industry is very rigid and hardly affected by inflation. Therefore, even though their dividends have low growth, you are guaranteed of a constant high yield.
Trends in Dividend Growth
Investors should constantly be on the lookout for growth trends of various dividend stocks. Avoid companies who have a history of decreasing their dividends. Check for a steady increase in the growth of dividends. But be very careful, not every “growth” means positive growth. Growth lower than the inflation rate actually means a decline in dividend yields.
The payout ratio should guide you in selecting a high-yielding dividend stock for constant cash flows. If a company has a payout ratio, higher than 100%, it should be avoided. The yields might be great at first. But, in the long run, it means that they will not be able to uphold their payout policy. Meaning that, a decline in yields is imminent.
Do not just rush to invest just because the dividends are high. It is advisable that you check whether free cash flows from company operations are being used to adequately cater for the payouts.
Earnings are a major factor to consider before investing in dividend stocks. You need to check quarterly earnings reports to see whether there is improvement. This will tell you how a company is performing and whether the dividends are likely to grow.
To be on the safe side divide the dividends with the company earnings for the year. The result should be no higher than 85%, particularly, where the company is in industries such as commodity and technology. If it goes beyond 85%, it means that with a slight decline in the company earnings, the dividend yields will significantly decrease.