If a business operates with stable cash flow and pays cash every quarter and the management does not have the opportunity to reinvest in the business, they can pay the dividend to the shareholders. If you are looking for income from your stock portfolio, you can select companies that pay conservative dividends and hold those stocks for the long term.
If You Are Buying the Stock for Dividend, Make Sure the Company Pays the Dividend Without Interruption and Has a History of Raising Dividends
When you are looking for good dividend companies to invest in, look for the following characteristics
- The company should be an established company and should produce stable cash flow for a long time
- The company should not have rejected or reduced its dividends at any time in its history. Businesses have to go through different economic cycles all the time-like economic expansions, slowdowns, recessions and depressions and the company should have survived in all the difficult economic cycles.
- If the company has a repeated history of repeatedly raising dividends, it is a great company to invest in for dividends.
For a higher dividend yield, dividend investors need to look for market sell-off to buy stock in dividend-paying companies.
What is the percentage of earnings paid as a dividend? Is it a small percentage of revenue?
They need to search for companies that pay out a smaller percentage of their revenue as dividends to the shareholders. This is because when the business goes through a hard time, it should have a cushion of earnings to meet the dividend payments. If not, it needs to cut the dividends to preserve cash to fight the downturn.
Payout Ratio = Dividend per share / Earnings per share as a percentage
The lower the payout ratio the better. If the payout is 80 to 90 percent, that is dangerous because there is 10 to 20 percent cushion available. When a business goes through a recessionary economic cycle, business earnings might decrease more than 20 percent. The dividends need to be cut. This is a double whammy, the stock price and dividends are hammered.