A time-tested strategy for building wealth is dividend investment which provides inflation protection in a way that bonds do not. Finding outstanding dividend-paying businesses, however, can be difficult.
Dividends are payments you receive on the equities you own on a yearly or quarterly basis. Typically, a firm will pay dividends in accordance with the earnings it generates within a fiscal year.
Dividend investing entails building a portfolio of carefully chosen dividend-paying stocks. These equities are purchased and sold in the same way as ordinary stocks. The benefit of dividend investing is that, regardless of the company’s profitability, dividends are paid out.
Here is a list of steps to take while choosing a dividend stock:
A dividend stock watch list is necessary first.
Just a shortlist of the five to ten businesses you would like to own. There are various strategies to find stocks that consistently provide dividends for your money. The stocks you choose can then be used to create your watch list.
Investors can find dividend information on the website of the Security and Exchange Commission, from brokerage firms, and directly from the companies themselves.
Examine Every Dividend Stock
You now have a watch list of five to ten dividend stocks that you might want to consider investing in. Choose a stock from the list and then study it.
Stop and move on to a different stock if your dividend stock doesn’t fit your selection criteria at any time during the process.
Historical Dividend Growth Rate Display
Why will the future be any different if a company doesn’t have an excellent track record of dividend growth? And how will we generate a consistent stream of dividend income that is also growing?
Review the compound annual growth rate of dividends over the last 1, 3, 5, and 7 years. That review provides a decent amount of history as well as a good understanding of the most recent dividend growth.
Find out the Dividend Policy of the Company
A well-articulated dividend policy is an excellent piece of knowledge. It is highly useful in predicting potential dividend growth in the future. Furthermore, the organization is more likely to achieve and uphold a clearly stated aim.
For example, in 2021, Apple paid an $0.88 annual dividend ($0.22 on a weekly basis). Thus, the dividend yield was roughly 0.50 percent based on Apple’s stock price of about $163 per share as of March 1, 2022.
Assessment of Dividend Safety
Investors only want to purchase and hold dividend equities whose cash dividends are protected from future decline.
A subjective assessment of dividend safety is made using many of the following criteria:
History of dividend payments
The ratio of dividend payments
Production of free cash flow
Financial standing
Health and growth strategies for businesses
Finally, look through the stock valuation.
There are various approaches to valuing a business or its shares, each with advantages and disadvantages. Usually, the multiples approach is used to compare a company’s value in the market to that of its rivals or the larger market.
Make sure the valuation method you choose is acceptable for the company you are assessing, and if more than one is, utilize both to provide a more accurate assessment.