Like any other type of investing, dividend investing needs patience and discipline. It will also help if you do these three things, as these could increase the odds of making money from betting on dividend stocks and aid you in creating a solid investment portfolio with good yield potential.
Learn About Dividend Payout Ratio
Determining whether a company can keep providing dividend payments right now and in the future plays an essential part in a high-yield dividend investment plan. The best way to find that out is by calculating the dividend payout ratio of the firm’s stock.
The payout ratio refers to the amount of dividends paid to shareholders during the year relative to the company’s earnings after tax (EAT).
Simply put, the payout ratio shows how much of the profit was used to finance the company’s operations and the amount given to the shareholders. The overall ratio is calculated by dividing the dividends paid by the firm’s net income.
You can also calculate the payout ratio on a per-share basis by dividing the dividends per share by the earnings per share (EPS). However, this formula may need more work than the first method since you will have to determine the EPS and divide the dividends by each outstanding share.
Nonetheless, both methods should give you the same result.
Consider Investing in Dividend Aristocrats
Adding stocks with a good dividend growth history to your portfolio can also provide a boost to your dividend investment plan.
However, if you’re having a tough time finding such high-yielding dividend investments, one thing you can do is to look into stocks that intend to raise their future dividends or have an excellent track record of either increasing or keeping their dividends unchanged.
That is where the so-called dividend aristocrats come in. Dividend aristocrats are S&P 500-listed companies that have raised their annual dividends each year for at least the last 25 years. They are a good option, as they can present steady dividend growth in the future.
Steer Clear of Cyclicals and Commodities
Keep in mind that every dividend is unique. Some stocks with a high dividend yield can be unstable or at risk of disappearing due to the industry the company is doing business in.
Two industries that you, especially if you’re an individual investor, need to steer clear of are the cyclical and commodities space.
Cyclical Industry
Companies in the cyclical industry are exposed to the business cycle, meaning they perform well when the economy is in robust condition and perform poorly when the economy is weak.
The business cycle tends to be unpredictable; therefore, investing in a stock in the cyclical space can be a riskier decision than choosing a stock that does not belong in this industry.
Commodities Industry
Commodity-driven businesses are at risk of seeing their profits decline when the price of the commodity they are following falls. Such characteristic makes companies in the commodities industry very difficult to predict. For investors, that means they need to further analyze any current dividend payouts.