Are you investing to receive passive income in the form of dividends?
Dividend payouts can be a welcome addition to cash flow, where investors get a lump sum of money back.
This can pay for a good meal with the family, or air tickets for a short trip.
How exactly can you identify a company that pays dividends well?
Here are 7 steps to help you determine if a company is worth investing your money to generate some dividends.
Step 1 – Check That The Returns Are Better Than “Safe” Investments
To see if it’s worth putting your hard-earned money in for dividends, you’ll want to make sure the returns are worth the risk.
What’s the one thing that Singaporeans are automatically contributing to every month, as long as they are employed?
That’s right! It’s our CPF, specifically our special account.
It will yield 4% for you annually, safely.
If your dividend stock can get you higher returns, up to a level you’re comfortable with, then you can consider taking the risk.
Do you share the Americans’ views about safe investments?
Step 2 – Check That The Company Spends Less On Capital Expenditure
Different industries will require different capital expenditure.
Some companies require more manpower so they may incur lower capital expenditure.
Some companies need to reinvest earnings into replacing equipment that could be costly… and that money is eating into what they can set aside for shareholders.
To maximize your dividend earnings, you will benefit from investing in companies that spend less on capital expenditure to grow.
Step 3 – Check That Company That Has Consistent Cash Flow
Cash is important for any business.
Without cash, the business can’t develop new products, acquire assets, pay dividends and reduce debt.
Free cash flow is important for the business to pursue opportunities that give more value to shareholders.
Step 4 – Check The Profits That Is Distributed To Shareholders
A business that has matured will hold less cash than a company that is aggressively growing.
This means more profits will be distributed to the shareholders.
A decent dividend payout to aim for is upwards of 50%.
Step 5 – Check The Amount Of Cash The Company Has
Stable businesses are reliable sources of dividend payouts.
The market capitalization of a business between $2 to just under $200 billion will be a good place to start looking.
You can determine the market capitalization of the business by multiplying the number of a company’s shares outstanding by its stock price.
Step 6 – Check That The Company Has Sustainable Growth
While it can be tempting to just look at the dividend payout a business is promising investors, you won’t want to be in the situation of buying into a declining business.
For reasons of sustainability, you will want to see the revenue is at least consistent if not increasing.
If revenue falls, so will the dividends you will stand to gain.
Step 7 – Check The Past 5 To 10 Years Of Payout History
To convince yourself that this business is worth investing in for dividends, you simply have to see what they have been giving their investors the past 5 years.
Check for 10 years if you are extra cautious.
This should give you a clear idea of how the business treats their shareholders over time.
With this 7 step guide, you should know how to check whether a dividend stock is worth your investment.