Let’s review how some of these ratios apply to one popular category of stocks: dividend payers. |
| Day 9: Dividend Spotlight |
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Over the last few days, we’ve shifted from conceptual trading strategies to practical, analytical techniques. You know the structure of income statements, balance sheets and cash flow statements. You also understand how to use ten metrics to evaluate the financial health of a public company.
Now, let’s review how some of these ratios apply to one popular category of stocks: dividend payers. Through bull markets and bear markets since 1900, stocks have delivered historical returns of about 7% annually after inflation. More than one-third of that return came from dividends—regular payments made by companies to shareholders.
After today’s lesson, you will understand: |
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| The Case For Dividend Stocks |
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Dividend stocks have two notable advantages
1. Dividend stocks pay you to own them, even when the market is down.
2. Companies that have paid dividends for decades are likely to stay in business. They’ll continue rewarding shareholders with higher dividend payouts over time.
In 2022, the S&P 500 was down more than 18% on a total return basis. Portfolios focused more squarely on dividend-paying stocks fared much better. As an example, the total returns for the WisdomTree High Dividend Fund (DHS) and iShares Select Dividend (DVY) ETFs were 7.9% and 1.8%, respectively. |
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| Dividend Stocks Vs. Bonds |
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| For investors who prefer income-producing assets, dividend stocks can be an attractive alternative to bonds. The advantages relative to bonds include: |
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| The disadvantages of dividend stocks vs. bonds are: |
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To mitigate those disadvantages, seek out dividend stocks with low payout ratios, low debt levels and consistent cash flows. These characteristics can help a company survive tough times without changing its dividend policy.
The share price might drop, of course. But if the dividend remains intact, you get paid to wait for capital gains to materialize. |
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| FORBES FOCUS: JOHN DOBOSZ |
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| John Dobosz is the editor of three Forbes investment newsletters: Forbes Dividend Investor, Forbes Billionaire Investor and covered call writing advisory service, Forbes Premium Income Report. Prior to joining Forbes in 2001, he was a producer and reporter at CNN Financial News, focusing on stories about entrepreneurship. He has also worked as a field producer for Bloomberg TV in New York, and as a reporter/researcher at Inc. Magazine in Boston. Born in Tampa and raised across the bay, he graduated n 1990 from the University of Florida with a B.S. in business administration with a concentration in finance. |
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| Reinvest For Maximum Compounding |
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When you buy a dividend stock, you must choose between reinvesting the dividends or receiving them in cash. Unless you are retired and need the income to pay your bills, you’ll want to reinvest.
Reinvesting dividends raises your share count with every payout. Each additional share or portion of a share produces more dividends. Over the long term, the compounding effect of this can be extremely beneficial because: |
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Mobile phone chip maker Qualcomm (QCOM) demonstrates the potential of rising dividends. In 2003, you could have bought Qualcomm for $17 just before the company made its first dividend payment of $0.025 per share. Today, Qualcomm’s quarterly dividend is $0.80—32 times that first payout.
If you are earning an annual dividend of $3.20 from QCOM on shares you paid $17 for, that’s a yield of nearly 19%. |
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| Buying “Cheap” Stocks With Rising Payouts |
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One compelling strategy is to invest in temporarily cheap stocks of companies that regularly raise dividends. To be clear, cheap stocks aren’t penny stocks. They’re companies that are trading at lower valuation ratios than their five-year historic averages.
You learned about valuation ratios yesterday. The big ones are price-to-earnings, price-to-sales and price-to-cash flow.
Valuation ratios don’t tell a company’s whole story, of course. To steer clear of stocks that are cheap for a reason, also screen your prospective stocks for: |
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| Stocks like those in the NOBL or VIG exchange-traded funds are excellent candidates. |
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QUIZ:
When are dividends typically paid?
A. At the end of the year
B. At the beginning of the year
C. Quarterly
D. Monthly
It’s homework time again! Choose two of the top holdings from exchange-traded funds NOBL or VIG. Analyze them in terms of PE, PS and PCF. Also review each one’s sales growth expectations, payout ratio and dividend track record.
Tomorrow’s topic: Five final strategies to chart your own investing course. |
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