Profiting with Dividend Stocks
Profiting from dividend stocks is one of the basics of good investing. Good investing meaning to say the trading period will be medium to long term. Why is it so popular then if you need to look at such a long period to see the returns?
The key to it’s popularity lies in the stability in profiting,
making solid returns consistently
Take for example, if putting money in a bank gives you a return of about 1% a year while a dividend stock gives you 3-5% return, which will you choose? On top of the dividends issued, you may potentially also gain from the upward price movement which can be another few percentage points. The even better news is that there are stocks that give out more than 5% dividend returns and 3-5% is just an average of typical payouts for quality dividend stocks.
Of course, there will be risks in any form of investments and on the downside, you may potentially lose out on any downward price movements. However with that 3-5% returns, your risk of losing is actually much lower than usual and there are ways you can trade more effectively with dividend stocks to make the best profits out of your trades.
Let’s looks at some numbers
Say you put $10,000 as an initial investment and let the stock do it’s magic. Excluding any market fluctuations and any increments in the dividend annual payout, at the end of 10 years you get a 163% growth, at the end of 20 years you get 265% growth and at the end of 30 years, you get a whooping 432% growth. This translates to a dividends earning of $33,219.42!
Say we change the investing pattern slightly. You put in an initial investment of $10,000 for the first year and top-up an additional $5,000 on subsequent years. Your growth seems to have been diluted due to the yearly top-up however, lets see the dividends payouts. After 10 years, your dividends payout is $19,178, after 20 years it is $81,862 and by 30 years, your total dividends payout went to $215,413 !!!
Okay now, you must be seeing the value of trading dividend stocks. Let’s dig dipper into the subject.
How to pick good Dividend Stock?
Point 1 – Mid to large cap stocks
These companies then to have reached maturity in their business and are no longer expanding aggressively. Hence, instead of reinvesting their profits back into the business, they will tend to return their earnings to the shareholders as dividends.
These companies also tend to have better track records, are more stable and less risky in terms of stock price fluctuations. They will have weathered through market crashes and still survived. Hence these stocks will definitely give you a better peace of mind.
Point 2 – Consistent Dividends Payouts
Companies that qualify should have a consistent payout of dividends on a yearly basis. They can pay out in different months of the year. Some do so 3-4 times a year while others payout once a year. Just bear in mind to add them up to calculate the total yield per year. Consistency in paying out dividends is also a sign of stability of the company.
Point 3 – Good Fundamentals
This is to re-iterate point 1 and to ensure you do a sanity check on the fundamentals of the company. You may refer to the fundamental analysis chapter to do a quick check. Make sure that the key fundamentals are healthy (revenue, profits, cash flow, dept-to-equity ratios). Main reason for doing so is to ensure you pick a good stock that will not expose yourself to falling stock price.
Point 4 – Solid Yields
The yield returns of the companies that you are searching for should be more than that of what you can get from a risk free rate like a 10 year US Treasury note. In comparison to bank interests, a relatively good dividend stock should beat the rates hands down. Look out especially for companies that payout increasing amounts of dividends over the years. It puts more money into your pockets over time and also helps you cover inflation risks.
Point 5 – Avoid Excessively High Paying Dividend Stocks
Companies that pay unusually high dividends tend to be in a risky business. Also, they tend to not be able to fulfill criteria of solid yields and consistent payouts. However, there could be some gold hidden in the stacks but do make sure that you examine in more detail how the company has been funding its dividends and threats to the cash supply.
- Understanding Basic Financials
- Financials Ratios that you Need to Know
- Finding Financial Info in Seconds
- Technical Analysis Basics