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Taken from 'Dividend Stock Investment Tutorial 2019' published on AskTraders
Dividend investing allows investors to create an income stream that builds on the underlying growth found in the market value of a portfolio. Over time, dividend-paying stocks reward investors for their loyalty and patience by providing secondary earnings which add to the net return of individual stock investments.
DIVIDEND INVESTMENT RISKSIn the 2008-2009 global financial crisis, most of major banks were forced to eliminated (or at least drastically reduce) their stock dividends. Generally, these were financial companies that had a long-established reputation as being stable quarterly dividend growers (for hundreds of years, in some cases). However, macroeconomic forces were simply too intense during the collapse and dividend investors were hurt in the process.The lesson here is that dividend payments are never fully guaranteed. Changes in the global economy or risks that are specific to individual companies will sometimes damage the outlook and limit profitability in dividend investment strategies. It’s also important to be wary of companies offering excessively high dividend yields. Remember, dividend yield rises when a stock’s share price falls. Thus, an extraordinarily high dividend payout could be a warning sign that the company is showing a weak earnings performance (and might even be in danger of cutting its dividend).
DIVIDEND PAYOUT RATIOS
The best indicator of whether a stock’s dividend is sustainable is its dividend payout ratio, which measures dividend payments due to shareholders in relation to a company’s net earnings (expressed as a percentage):
Dividend Payout Ratio = Dividends Paid / Net Income
- Dividends payouts operate a discretionary distribution of corporate profits and they provide an additional reward/incentive for shareholder loyalty.
- Establishing long-term positions with a collected portfolio of quality dividend stocks can generate highly attractive and stable returns over time
- When a company (or mutual fund) is comfortably able to distribute dividends to shareholders, it is often a good indication of financial health.
- In most cases, dividends are distributed as cash payouts on a monthly, quarterly, or annual basis.
- However, a measured approach to dividend investing is required in order to build a strong foundation and avoid potential losses.
- However, investors must conduct due diligence in cases where extraordinarily high yields are offered as the dividend payout ratio (i.e. above 60%) might reveal a lack of sustainability.
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