Post on 26-Jun-2015
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Welcome to Dividend Stocks Research Your premier site for
Rankings and Reviews of the best dividends stocks around. For more
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Hi, My name is Aaron and I‘m with Dividend Stocks Research, and today
were reviewing our recently published article…
Dividends are good. They’re just like paychecks that provide regular
income.
But dividends are even better when they grow. So when you look at a
dividend stock to invest in, look for a stock that will keep giving you a
raise for years to come.
Here’s how.
The key to growing dividend income isn’t driven by which stocks you
invest in. It’s driven by your strategy, and your discipline as an
investor.
The simple key is to create a way where you can regularly save. Even
if you are in the early stage of retirement, putting a modest
amount of money into your dividend stock portfolio each month will fuel
income growth as you move into your later retirement years.
To accelerate this growth, reinvest the dividends instead of taking
payments.
Here’s the benefit you’ll pick up along the way. Dividend income
growth tends to be smoother than the growth of overall stock market
returns. You’ll run into fewer bumps, fewer wild swings, and over time, your total return is stronger.
This is how you keep giving yourself one raise after another. To help
make sure it happens, keep an eye on the essential ingredients of
dividend income growth.
To grow dividend income one of three things needs to happen.
1. The stocks you hold continue to increase their dividend payments.2. You invest in stocks that pay a high yield.3. You look for stocks that give you a bonus along with your regular dividend.
Does history really matter?One of the best ways to determine if a company will be able to grow its
dividend payment quarter after quarter and year after year is to look
back. Look at the actual performance and the pattern of
dividend growth.
Let’s take a few examples.
IBM Corp. (IBM)IBM has been growing it’s dividend
since 2000. It delivers a yield of 2.24%.
Dividends are nothing new for IBM. They’ve been paying them since
1925, when the yield was a highly generous 20%. (Within a year, the IBM stock split 3 for 1. But that’s
what life was like back in the roaring twenties.)
Visa (V)Visa has been growing its dividend
since 2009. When you look at Visa, you’re struck by the low yield, less than 1%. But
the payout ratio of 17.9% is also relatively low, which suggests there
could be room for significant dividend growth ahead.
Coca-Cola Co. (KO)Coca-Cola Co. has paid a quarterly dividend since 1920. And they’ve been paying growing dividends for 51 years. The stock delivers a yield
of 2.99%. When a company like Coca-Cola has been growing its dividend payments and making them like clockwork for
more than a half a century,
Coca-Cola Co. (KO)You’ve got a pretty good indication
that the wheels aren’t about to come off.
But naturally, history isn’t a foolproof roadmap for the future. You don’t want to confuse a track
record with a performance guarantee.
And to grow your dividend income, you don’t want to run off into the
world of high yield stocks without an assurance that these high yields can actually be paid for years to come.
Here’s why.
For every Visa where the yield is below 1%, there are stocks paying a high yield. But appearances can be deceiving, and when you peel back the numbers behind the high yield,
you’ll usually make some interesting discoveries.
There is usually a good reason why a stock’s yield is high, and sometimes
this reason is not comforting. Management may simply be trying to attract investors, or to bring in
capital. Because the fundamentals of the business aren’t in good shape,
a higher yield is used as window dressing.
Whatever’s happening, you’ve always got to keep an eye on the
classic risk and reward factor. Ask yourself how long a company will be
able to pay a high dividend, and what will happen to the underlying value of the stock if the dividend is
cut.
To grow dividend income by investing in higher yielding stocks, investors often look at an Exchange Traded Fund. Investing in an ETF
provides the diversification that can protect investors from the ups and
downs of an individual stock.
It’s often easier to find a high yield when you look at global markets.
Because emerging markets offer the potential for stronger growth rates, growing dividends can be available.
An example of an ETF for investors interested in high yields on global markets is Wisdom Tree Emerging
Markets Equity Income Fund (DEM).
The strategy of growing your income, the way to make sure your stocks keep giving you a raise with
higher dividends, is not always based on capturing a higher yield.
Higher yields can complement lower yielding stocks when it comes to growth, but keep in mind that the
higher the yield, the harder it will be for the company to keep paying.
And here’s something else to keep in mind. There’s another way to collect higher paychecks without the risks of investing in a high yield stock.
Regular quarterly dividends are the bedrock of investing for income.
And when dividends grow, so does income.
But how can you collect more?
Investors can pick up extra payments. Special one-time dividends. These one-time
distributions can happen at any time for any reason.
We saw a flurry of them a few years ago when concerns about new taxes on dividends prodded companies to
“beat the clock” and pay special dividends ahead of schedule to keep
shareholders happy.
Costco (COST) did this a few years ago, and actually borrowed money
by issuing bonds to pay its shareholders $3 billion in a special
dividend.
Can you target the companies that are likely to pay this kind of special
dividend?
The best way is to look at the balance sheet. Look for companies sitting on lots of cash. When you
find a company where there is four or five times as much net cash as
total debt, a special dividend payment could be brewing.
This might also be a sign that the company is prepare to reward
investors over the long haul with consistent dividend growth. The financial war chest to pay these
dividends is already well stocked.
Now you know what to look for. Stocks that deliver a history of growing dividends, and that are
positioned to sustain this growth. Stocks where you believe the
advantages of a high yield can stick around, and won’t disappear.
This is how dividend investors minimize the risk of capturing
growing income.
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