Dividend Stock Investing – Lessons learnt in recent past
The entire dividend landscape changed during 2008 and 2009, and it was not for the better. There were 288 companies that were forced to cut payouts just during the final quarter of 2008. Standard and Poor’s reported that there were another 804 public companies that followed suit the following year. The cost to investors was an additional $58 billion.
Before getting involved in dividend stock investing there are five major lessons you should learn.
1. Dividends are never guaranteed
There were many people who chose to ignore this particular lesson in the months and years that led up to the financial crisis. Collecting interest on investments like bonds and CDs is a given but that is not so with dividends. It is up to the board of directors to decide whether shareholders will receive cash dividends or not. It is in the best interests of the company for the board to attempt to maintain or even increase payouts because it is a sign that the company is financially sound. A company that is financially strong can, in turn, attract more investors.
2. Do not chase high yields
Greedy investors in recent years were taking higher risks to find acceptable yields. This was because market yields and interest rates were so low. This proved to be costly in the long run. Any dividend yield that is higher than 2.5 times the market average is something to avoid. With the current rate at two percent, you should avoid anything listed at five percent or higher.
3. Cash flow is king
Pay close attention to cash coming in and going out for at least the past five years. Focusing on earnings will not give you a true picture of whether a dividend will be sustainable or not. Make sure you account for capital expenditures and the amount that is left is the cash flow available to the company to buy back shares or pay dividends. This is called free cash flow. You also want to find out how much the company paid out in dividends annually. If the cash flow amount that is considered to be free is bigger that the dividends paid, then you can be assured that the company can maintain the current dividend.
4. Be selective
Be selective when you are choosing companies to invest in and keep your investments diversified. Cuts in dividends tend be widespread when the economy is in crisis. Do not rely solely on ETF’s or an index to protect you. You should know that the ETF is only permitted one rebalance each year. Many owners were left holding onto stocks that were suddenly not paying dividends at all or were paying out very low rates until the rebalance was allowed to occur.
5. It pays to diversify
It is still important to diversify. There is no doubt that the financial industry was hurt the worst over the last two years with deep dividend cuts. Even heavily diversified portfolios were hurt when the crisis hit but they were far less affected than those that were heavily weighted with financial stocks that were initially promising higher yields. Sector diversification is still very important even if you are forced to give up some yield at the outset.
With these five tips you will have no trouble building a portfolio of diverse companies that will yield above average dividends with enough free cash flow left over sustain continued growth.
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- Blue chip dividend stock and Dogs of the Dow theory
- Dividend investing for stocks with high dividends choose DRIPs
- Dividend reinvestment plans
- Stock Investing Strategies – Value Stock Investing
Filed Under Dividend Stocks, how to get rich, Stock Market Basics, stock market for beginners | Leave a Comment
Tagged With dividend paying copanies, dividend stock investing, dividend yield, stock dividend payout
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