Dividend stocks are companies that regularly pay shareholders a share of their earnings or dividends. These payments are funded by profits generated by a business but do not need to be retained to reinvest in the business. As an investment category, dividend stocks also have an impressive track record of helping people build wealth in the long run. For a company to be successful as a dividend stock, it must have a strong and solid business that consistently generates more profits than it needs to run. While it also has no better use of these profits, such as reinvesting in the company, than returning them to shareholders. In addition, dividend-paying companies also have a clearly defined corporate policy to pay a dividend determined by their boards.
Below we have listed some important elements that you can look at to be able to select dividend stocks yourself:
Once you have a good idea on how dividends work, there are a few key concepts that can help you find excellent dividend stocks for your portfolio.
A stock’s payout ratio is the money it pays per. Dividend, divided by its earnings per share. In other words, this tells you what percentage of earnings a share pays to shareholders. A reasonably low payout ratio (say 40% or less) is usually a good sign that the yield is sustainable.
It’s a good sign when a company raises its dividend every year, especially when it can continue to do so during recessions and other difficult economic times.
Stable revenue and earnings growth:
When looking for the best long-term dividend holdings, prioritize the stability of the companies you are considering. Unpredictable revenue (up one year and down the next year) can be signs of trouble.
Durable Competitive Advantages:
This is perhaps the most important feature to look for. A sustainable competitive advantage can be found in several forms, such as a proprietary technology, high barriers to entry, high cost of customer change or a strong brand name etc. Also a look at the sector can be worth the research, if you want a stable dividend stock certain sectors are less risky. Where is others involve a greater risk, and obviously a greater potential reward as well.
This is the last on the list for a reason. A high yield is obviously more preferable than a lower yield, but only if the other four criteria are met. A high dividend is only as strong as the business that supports it, so compare the dividend once you’ve made sure the business is healthy and the payout is stable. But with high reward often comes a greater risk.
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