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Dividend investing is a great investment strategy. It has been found that stocks that pay dividends are much less volatile and have even performed better than the S&P 500. This is because when you invest in such stocks, investors also get an additional source of income apart from the necessary capital appreciation. When that income accumulates over a period of time, the return can be considerable.
In today’s high inflationary market, people are constantly losing out on their purchasing power. Knowing how to find the best dividend stocks and investing in them, provides a passive income which is preferred by many investors. Dividends are a reliable stream of income that can fund the golden years of an investor.
However, despite its lower volatility and attractiveness, choosing dividend stocks is not an easy task. To earn rich dividend payouts one needs to have a disciplined investment approach spread over a longer period of time. So, if you are someone who wants to invest in dividend-paying stocks but does not know how to find the best dividend stocks, this article can help you clear your doubts.
How to Find Dividend Stocks in 2023
The Ultimate Guide on How to Find Dividend Stocks in 2023
What Are Dividends?
When a company earns profit, it might distribute that profit either fully or partially to its investors. Therefore, dividends are nothing but the profits of the company that the shareholders earn against the shares owned by them. Also, dividends can be paid in the form of cash, stocks or through any other manner.
What is Dividend Yield?
Dividend yield= (Dividend per share/ market price per share)*100
A dividend yield is a ratio between the amount of dividend a company pays and the price of its share. So, the higher the yield, the better the company’s dividend payouts.
However, the dividend yield is not the perfect measure to buy dividend-paying stocks and this is the mistake that most newbie investors make. While high dividend yields are not bad but a very high dividend yield is often associated with falling in a stock’s price due to the fear of dividends being cut. This phenomenon is known as the dividend trap.
To avoid such dividend traps, one should be cautious and check for the following signals:
- Look at the past history of an organization’s dividend payments to determine the sustainability of the payments. Besides, one should also check whether there has been any growth in the dividend payments and if so the rate and interval at which the payouts have been increased.
- If a stock is having a much higher yield compared to its peers, it might not be a buying opportunity but instead a sign of trouble. So, the fundamentals should also be verified.
- Cross-verify the dividend yields with the payout ratios to determine the sustainability of the dividend payouts.
- Thoroughly study the financials of the company especially its debt, cash, and other assets and liabilities.
- Check the company’s position with respect to its industry. Verify whether it is in perfect shape to compete with its peers and that there are no such events that put its going concern assumption under threat.
How to Find the Best Dividend Stocks?
Check the Sustainability
One of the easiest means of selecting a good dividend stock is by checking whether its dividend history displays sustainability. If a company is not stable in maintaining its payouts there are chances of a decline in its share price due to the fear of a dividend cut.
To see whether a company’s dividend payments are sustainable one should see what percentage of its profits it has been using to pay its investors. Usually, organizations which share less than 50% of their earnings as dividends are more likely to maintain their dividend payouts in any kind of market situation. However, exceptions do exist. Like, many REITs can payout more without much trouble.
Avoid the Highest Yields
There are many stocks that have very high dividend yields and are very tempting. But such a selection approach can often be disastrous as mentioned above. The market does not trust the sustainability of its payouts. Therefore, unless one is an expert in analyzing stocks it is better to avoid selecting stocks that have the highest yields in the market.
The Growth in Dividends
Dividend growth is much more important than dividend yield. There are many stocks which have high dividend yields but fail to grow their dividend payments over time. Growing dividends often help in combating the effects of rising portfolio costs. So, while selecting a dividend stock look out for the growth rate in dividends and earnings. Further, if a company is capable of strong and sustainable cash flows from its operations and has a business model that allows it to earn revenue from multiple sources, it can possibly also grow its dividends regularly.
The debt-equity ratio of a company is another important factor that determines the probability of future payouts. Lesser the debt-equity ratio the lesser the risk. It is safer to select stocks that have a debt-equity ratio of less than one.
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