Don’t Just Pick Any Dividend
Dividend is earnings distributed to the shareholders in the form of cash. Now, not all publicly-traded companies pay dividend. Most of the dividend-paying companies are profitable or have long history of profitability. This is key because in the long run, I believe profit will dictate stock price movement. Therefore, picking a good dividend paying stocks will pay off in the long run.
What is the criteria that you should be looking for in dividend paying stocks? Basically, we want our companies to maintain or increase its dividend payment for a long time. The following guidelines will help you in identifying the good dividend paying stocks.
Long History of Profitability. I prefer companies that have at least 3 years of profitable years before initiating dividends. Business tends to fluctuate and I want to make sure that the company is solidly profitable before they initiate dividend payments.
Average Payout ratio of less than 75%. Payout ratio is the ratio of dividend paid versus net earnings. For example Bank of America (BAC) gives out $ 2.00 per share of dividend while it earns $ 4.15 per share. This brings its payout ratio to 48%. Payout ratio of less than 75% ensures continued dividend payment even when business is less than stellar. Furthermore, the company will still have enough money to expand its business if needed to.
Predicted Earning Growth of at least 0%. That’s right. Earning should stay constant at the very least. If earning plunges, the dividend eventually will be cut. No, we do not demand earnings to grow by X amount. We just need it to be constant. If you calculate that a stock is already undervalued with earning growth of 0%, then it will be deeply undervalued when their earning is growing. When earning is growing, dividend payment will follow suit.
Net cash of at least $ 0. What I meant here is the amount of net cash that the firm has on its balance sheet. Net cash is calculated by subtracting cash & cash equivalent with long-term debt. When long term debt exceeds cash, the value of net cash will be negative. We prefer companies that have a positive net cash. This way, even when business falters, it still have enough cash to operate its business or perhaps continue its dividend payment.
Clean Bill of Health. This is important. Some companies meet all of the above criteria but its accounting is under investigation by the SEC. What good does it do? Therefore, make sure that the company in question has a clean book and SEC is not investigating its accounting practices.
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