If you’re approaching or are in retirement already, then you’re probably considering buying dividend stocks. These can grow and throw some cash your way regularly.
However, dividend growth is not something only the older folk should think about. Even if you are on the younger side, while the conventional advice often handed out is to bet on high-growth stocks that might not payout any dividends, dividend stocks investment is still a fantastic way to diversify.
With a constant and growing cash flow stream, dividend stocks can allow an investor to use the cash to meet their day-to-day needs or reinvest the cash with the goal of compounding their interests.
Like most investing principles, investing in dividend stocks is really not that difficult. Once you get over the learning curve, you’ll find it’s easier to navigate than you may have thought.
Looking to get started? Read on for seven amazing tips on how you can grow your dividend investments as a beginner.
Assess Growth Potential
Good investors assess their dividends growth potential. To analyze this growth potential, not only will you have to know how much free cashflow per/share of the company can grow over time but you’ll also have to analyze the payout ratios of the company.
All this will come down to the growth prospects analysis of the underlying business, which will then need you to review management’s capital allocation policies, margin expansion potential, total addressable market and the competitive advantages of the company.
Basically, all you’d usually need to assess when reviewing any dividend, stock payer.
Know The Rules
Different stocks have different rules as far as dividend payouts are concerned. For example, aside from the regular common stocks which everyone usually knows about, you can also get your hands on special-classed dividend-producing equities the likes of Business Development Corporations, Real Estate Investment Trusts and Master Limited Partnerships.
All the above mentioned high-yield investment classes have different rules for how they are taxed and how many dividends they’re required to payout.
Invest In Things You Understand
A stock screener will help you apply the quantitative filters you’ll need when making such investments. Once you’ve screened all the possibilities out there, make a list of all the dividend stocks that have the potential to grow.
Carefully evaluate and scrutinize this list of companies you’ve jotted down and then only try to pick the businesses that you can say you truly understand.
It’s key in financial planning you ask yourself some of these very important questions:
Do I know their product?
Do I fully understand the business model they’re using?
Do I know how the business makes money?
Is That Particular Stock Reasonably Valued?
This is arguably among the most vital factors of any good dividend growth investment strategy. You’ll want to look at dividend stocks that have outstanding upside potential even though they may possess limited downsides.
If you want to find these types of stocks, look for the ones that are well-known for being shareholder-friendly. Next, run what you’ve picked through a thorough quantitative analysis, that should include the below list of criteria for finding dividend stock that that has been undervalued:
EBITDA/Enterprise Value ratio of below 10x
Price/Earning Per Share ratios of below 20x
Stocks that have been increasing dividend by at least five percent per year for a long while