Why invest in companies that pay dividends?
First of all, it is a very predictable stream of income and requires minimal involvement:
- Dividend-paying companies provide tax benefits.
- Dividends provide certainty about the company’s financial well-being.
- Regular dividend hikes, in most cases are higher than the level of inflation.
- It allows for easy reinvestment of dividends by using a dividend reinvestment plan (DRIP).
- It provides cash flow even when there is uncertainty in the market.
- The DRIP provides for easy compound interest implementation.
- Building a diversified portfolio of dividend companies will only cost a one-time brokerage fee.
- Dividends are more stable than stock prices.
There are endless parameters and indicators of shares that may be analyzed to make a decision, but we try to keep it simple. The most important indicators in our decision to buy a stock are the following:
- Earnings per share (EPS) growth
- Dividend growth
- Dividend yield
- Dividend payout ratio
- Company industry
We analyze a company first and check its EPS and dividend. A company must have a growing EPS to sustain increase to its dividend. The dividend yield is another key indicator because it defines how much cash flow we receive for each dollar invested. The dividend payout ratio shows that the current dividend is safe, i.e. how the current earnings support the dividend. The lower the ratio the better. The company industry is important as a part of the overall portfolio. Ideally, we aim to hold shares from different industries, thus diversifying our portfolio.
We also pay attention to the company dividend policy when there is market uncertainty. The last time was in 2008, and if a company did not cut its dividend during the 2008-2010 recession, then that is a very good sign for us.
Our understanding is that the last thing any company does is reduce its dividend. For us, it is like a red flag, which indicates that a company is having difficult times. We sell the equity if any of our holding companies reduce their dividend. It also means that our stock analysis was not 100% correct, and it gives us another opportunity to look for a better equity.
We do not believe that picking stocks requires a huge amount of time and knowledge. Of course, you must gain some knowledge to make an intelligent decision, but it should not be a reason to let someone else manage your financial future.
We hope to inspire you to take your financial future into your hands and hope you will find our posts useful. Please remember that you and only you control your future. No one has the ability to predict or foresee what the future may bring, but when we control the situation wisely, we can achieve success.
