subject: Why Dividends Are An Important Part Of Your Investment Strategy [print this page] There are several different ways to make money in the stock market. One of these ways is to purchase shares of stock and wait for the stock price to appreciate to the point of you making the return that you expected. Another way is to purchase stock which pays dividends and also appreciates in value. In this way, you are not only making money from the appreciation in value but you are also making money from the dividends. Another way that is not open to most of us is to become a broker and make money from giving advice to other investors.
I wanted to discuss the importance of investing in dividend stocks. Companies which issue dividends are generally the larger, well established companies. They have grown to a point where it is not necessary for them to reinvest all of their money into growth. They have a sizable amount of money and can afford to divide it between growth and giving back to their owners, i.e. the shareholders.
A bear market is definitely the time to purchase stock in dividend issuing companies. It is harder to make money in a bear market than in a bull market. Because of this, obtaining a quarterly dividend will help you to continue to make a return from your money even if the value of your portfolio is going down. You know that a bear market eventually returns to a bull market and if you wait long enough, your portfolio will return to profit. However, investing in seven to ten percent dividend paying companies will ensure that you continue to make money from your investments, and you can beat the inflation monster.
There are several different advantages to investing in dividend paying companies. One is the flexibility you can obtain from your investments. As you obtain money from dividends, you can choose to reinvest that money and let it continue to work for you. Also an increasing dividend allows you to fight inflation.
A company which gives out dividends is also a strong company. In order to give out dividends, a company has to generate enough cash to fund its core business and still give out dividends. Thus, a dividend paying company is by nature a strong company. This is true unless they are so blind that they do not realize they are spending their way into oblivion. Therefore, it is your job as a savvy investor to watch their cash flow and if they appear to be making bad decisions, you should get out while you can.
If you do decide to invest in a dividend paying company, you should make sure that they can continue to pay dividends. This means that you need to watch their earnings and cash flow generation. Owning a share of stock is the same as owning a portion of the company. You should treat your stock investment accordingly.
A ratio known as the payout ratio is determined by taking the amount of dividends paid out and dividing that by the income generated by the company. An example is that if a company pays out 5,000 dollars in dividends and makes 100,0000, then their payout ratio is 5 percent. A companies sustainable payout ratio should never be more than 75 percent. Translated another way, the companies dividends should never be more than 75 percent of their earnings. In this way, they should be able to continue to pay out dividends through the years.
Another thing you should watch for is how long the company has been paying dividends consistently. If they have a track record of over five years of paying dividends they are probably a good risk. Lastly the dividend yield is a good thing to watch. The yield is the amount of dividend paid out as expressed as a percentage. A company may payout 1.50 per share but it may be only a 3 percent yield. Utility companies have a history of paying out large dividend yields and they are priced quite well at this time. They are good companies to look into as an investment to make money on your stock portfolio.
