Over the last year or so we have seen a lot of ups and downs in the market. In this type of market buying and selling of shares by trying to time the market is like playing with fire. Another option is to look at dividend yield stocks. Dividend is a tax-free income. Investing in stocks which give regular dividends is called dividend investing.
Investing in good dividend yield shares dual advantage of a consistent cash flow in the form of dividend and potential for capital appreciation. (Dividend Investing + Capital appreciation = Great Returns)
Dividend investing focuses on identifying solid companies with a record of growing their dividends each year; and an expectation that it will continue to do so in the future. History has proved that stocks that pay constant/growing dividends have always out-performed those that don’t give any dividend or have inconsistent dividend payout history.
Dividend investing is usually considered safe in all market situations. It provides diversification and thus reduces investment risk.
Spotting a Dividend Yield Stock
Dividend yield is the dividend per share divided by price per share. In the last one year stock prices have crashed, so the dividend yield has gone up. However, one should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.
There are several other things to look out for in a stock before considering it a dividend counter to invest in. Some of the determining factors include:
- A company that has a history of paying a consistently growing dividend is better than the one that pays a consistent, but steady dividend. And the consistent but flat dividend is better than a company who has had to cut its dividend.
- Whenever a company pays dividend, it has to pay cash. That means the company is able to generate cash from its operations to pay the shareholders. Cash flow is King. A company that generates a steady or growing operating cash flow is better able to fund a dividend than a company that cannot consistently generate cash. But take care of companies which pay dividends out of cash generated in the earlier years. Look at the cash flow statement.
- The stronger the balance sheet the better. Stronger here meaning less debt. A company with no bank debt has a stronger balance sheet because it can borrow if necessary to support operations and the dividend if need be.
- Keep clear of companies with high fluctuations in profits. As we all know that investing in stocks is risky
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