Wednesday, June 1st, 2011
When you, as an investor, are looking at income earning opportunities, you should definitely mull over the option of dividend growth investing. Dividends allow you to enjoy your share in the profit of a company on a quarterly basis. Dividends are the total amount of money that a particular company pays out to its shareholders. The amount of dividend depends upon the performance of the company and dividend growth requires that a company have a sustainable growth model. Remember, however, that dividend payments are not set in stone. It entirely depends upon the prerogative of the company to offer dividends to its shareholders, or not.
Dividend growth investing is an excellent strategy that you can use to maximize your cash income generated from your equity investments. In fact, if you can put in place a smart and consistent dividend growth strategy, you can replace the income from your regular job. Or, if you are in debt, you can utilize the dividend proceeds to become debt free.
However, to design a successful dividend growth investing strategy, you must have good knowledge of the dividend growth companies on the market. To find dividend growth stocks, you can check out the historical dividend performance of various companies on the Dividend Achievers and Dividend Aristocrats lists.
Of course, past good performance does not ensure robust future performance. Rather, you have to select stocks which are fundamentally strong and which are undervalued at the current time to frame out a successful dividend investing strategy. Here are few tips so that you can find out successful dividend investing strategy.
Dividends are not rights but privileges
It is to be kept in mind that dividends are not guaranteed, rather they are more like privileges enjoyed by the shareholders. It depends entirely upon the discretion of the board of directors of a company to issue dividends to the shareholders, given the condition that the company has scripted a solid financial performance. Paying dividends to the shareholders shows the financial strength of a company and it also attracts income-minded investors to the company’s fold. Again, when a company cuts back the dividend amount, it shows that the company is not doing well.
Be skeptical about very high dividend yields
Do not expect to earn huge money with super-yield dividends. In fact as a general rule, any dividend yield which is over two and a half times the broader market, should be viewed skeptically. It has been seen time and again that many stocks fared exceedingly well and fetched super returns and dividends to the shareholders during the bull phase but plummeted appreciably during the bear phase, offering no dividends at all to the shareholders. This has been the case with many real estate investment trust (REITs), with their stock prices receiving a serious drubbing during the bear phase.
Analyze the cash flow statement
To find a high-dividend stock, it is important to analyze the cash-flow statement of a company. Check whether the company has the required cash to pay out the dividends or it is resorting to debt or selling stock to finance the dividend payment. If the company is selling stocks or resorting to debt to pay out the dividends to the shareholders, it can’t be a sustainable.
Follow the above mentioned tips to find out successful dividend investing strategy and to earn a lot of money.
This guest post is written by I Davis. She is the Community Member of http://www.creditmagic.org/ and has been contributing her suggestions to the Community. She is quite knowledgeable of various financial matters like tracking down identity theft, money investment tips, credit card debt, credit card fraud and has a unique approach to analyze them. Check out her articles on various financial topics with special emphasis on ‘Credit’ related issues.
Posted in Making Money | No Comments »
Thursday, May 5th, 2011
The Dividend Growth Model, also known as the Gordon Model, is a fundamental analysis methodology for determining the value of a stock or business. This model is used as a strategy for investment based on the dividend yield. It values a company based on the dividends currently paid as well as the pattern of dividend growth that the company has displayed over time. Although not all investors are comfortable with this strategy, it is an important concept for dividend investors to understand.
Companies with decent average dividend yields and reasonable payout ratios are thought of as reliable and safe investments that offer income as well as an opportunity for capital growth. The dividend growth model reflects how a company has performed in the past.
Since it is just an indicator of past performance, it will not guarantee how a company will do in the future. However, we can only use the information that we have to make an informed investment decision. So, in making an investment, the dividend growth model is a very useful tool for the construction of your portfolio of investments that seek to provide a growing income stream. However, it is not the be all and end all of due diligence that should be performed on a company.
To calculate how much a stock is worth based on the dividend growth model, you will need these three things:
1.) Current dividend payout of the company
2.) Growth rate of the dividend
3.) Your required rate of return.
The current dividend payout and growth rate of a company can be researched online. I like to use Reuters as they display a lot of dividend information along with the other necessary financial information.
Your required rate of return is based on personal requirements for return on your investment capital.
How To Calculate Value Based On The Dividend Growth Model:
- Add 1 to the dividend growth rate. For example, if the rate is 12%, add 1 to 0.12.
- Multiply the sum with the current dividend payout. For example, if the payout is $1.50, multiply that by 1.12 to get 1.68.
- Divide the product, 1.68, by your rate of return less the dividend growth. For example, if your rate if return is 20%, less dividend growth rate of 12% is 8%. Divide 1.68 by 8% or 0.08 and you get $21.
The above example values the stock at $21 based on a 12% dividend growth rate. Compare this value to the most recent closing price of the stock you’re considering. If the closing price is lower, then the model has indicated that this stock has met your criteria and is worthy of further consideration.
The dividend growth model relies on variables that can change over time and, as such, can only calculate how the stock should be valued at the current dividend growth rate. As we have discovered from the most recent market downturn, dividends do not grow at a constant rate in perpetuity, so the value that we calculate using the dividend growth model can change!
Of course, as with any valuation model, there are risks associated with investing based on purely the dividend growth model. It does, however, provide a good data point for your investment analysis.
To know if the dividend growth rate growth can be sustained for many years, one can also evaluate the sales growth and profit margin trends. As market conditions change, it is useful to continue to run potential investments through the dividend growth model, accounting for changes in dividend growth rate and the dividend payout.
Posted in Investor Education | 1 Comment »
Monday, April 11th, 2011
What We Have Learned
It is very important when investing to not only evaluate a company against others in its sector or industry, but also against itself.
In previous articles, we have discussed the dividend payout ratio, free cash flow, Z-Score and Return on Invested Capital (ROIC). All of these metrics are used as a way to evaluate stocks against their peer group, but also against themselves at different points in time.
When we have narrowed a company down against its peers, it is then time to evaluate the stock against itself at different points in time. Doing this can help us to determine if a stock is selling at a reasonable price.
How To Use Average Dividend Yield
One of the greatest ways to evaluate a dividend stock against itself is to determine the average dividend yield that that stock has paid over the past number of years. If the stock has a higher than average yield, compared to its own historical average, then it may indicate that it is a better time to purchase shares (all other factors being equal).
There is an excellent tutorial on calculating average dividend yield at DividendsMatter.com. I will highlight some of the main points here, but I highly suggest that you read the full tutorial.
First of all, I like to gather 10 years worth of data for the stock. This is easy to do because the stocks that I analyze have very long histories of paying dividends. The information we need is the high and the low stock price, and the dividend paid out for each of the last 10 years.
This data can be gathered from many sources, including the company website. However, I prefer to use Yahoo Finance because the dividend information can be filtered out from the stock price using this option.
This is all the historical information we need. Now, from this information, we can calculate the high yield and the low yield for each year. The high yield is calculated by taking the annual dividend and dividing by the low price. Similarly,the low yield is calculated by taking the annual dividend and dividing by the high price.
High Dividend Yield = Annual Dividend / Low Stock Price
Well Worth The Effort
The mathematics of the process is very elementary, but it does take some time to gather the information. This is certainly time well spent and I suggest that you practice on a couple of your favorite stocks.
You will find that buying high quality, dividend growth stocks at prices above their average dividend yield will give you a margin of safety and confidence to hold the stock through thick and thin.
Obviously, this is one metric of many that will help guide you in your quest to buy quality dividend growth stocks.
Please see: How To Choose Dividend Growth Stocks . for additional learning.
Posted in Investor Education | 3 Comments »
Wednesday, August 5th, 2009
Just a few days into August and markets seem to have picked up where they left off in July.
Here’s a summary of market action and key developments from last month, including monthly benchmarks.
- Investors saw more data indicating that healing is underway in the global economy. Increased optimism paved the way for a fifth consecutive month of gains across world markets.
- International stocks advanced. The MSCI World Index returned 8.4% (in $US terms). Since March 9th, the MSCI Asia Index has risen about 58% in local currency terms.
- Commodity prices rose. Copper is up more than 80% year-to-date supported by increased demand from China. The S&P/TSX Composite Index benefited, adding 4%. The S&P/TSX has climbed 45% since hitting a five-year low on March 9th.
- In the U.S., stocks made up more ground. The Dow Jones Industrial Average (DJIA) had its best month since 2002, up 8.6% . The S&P 500 Index advanced for the fifth consecutive month (the longest streak since 2007) gaining 7.6% . The S&P 500 is now up more than 40% since March 9th and Monday, it closed above the 1,000 level for the first time since November 2008.
- Volatility continued to be a key theme in currency markets. After falling more than 6% against the U.S. dollar in June, the Canadian dollar appreciated by 7.4% versus its U.S. counterpart in July. This cut into returns on investments denominated in $US. Case in point, the 7.4% gain on the S&P 500 was essentially wiped out when converted back to C$.
With much of the latest economic news continuing to look less bad (over 70% of companies beat expectations last quarter and it appears US housing may have found a bottom), the economy looks to be on the mend.
However, we must realize that the rate of recovery that we are seeing is not normal and likely cannot be maintained long-term. That said, as an investor looking out 5+ years I belive valuations in the equity market are still low and the potential remains for double-digit returns heading forward over a 5+ year horizon.
Posted in Investment News | 2 Comments »
