Many investors consider dividend paying stocks to be a boring investment option, as they are the safest investment option – once you invest in dividend paying stocks of any company, the company pays you the divided monthly or quarterly, depending on its policy. Regular dividend payments are usually safe. And safe is boring.
People think of slow-growth businesses like utility companies when it comes to high divided providers. Why do these slow-growth businesses come to mind first? They come to mind first because most people put too much emphasis on a high dividend yield. But if the emphasis on the dividend yield is lowered, dividend stocks can also become dynamic growth stocks.
A rising dividend is just as important as a generous dividend. And a low dividend-yield company does have the ability to raise that dividend in the future. Several indicators signal if the dividend is likely to be increased in the future.
Look for companies that are financially flexible. They should have solid balance sheets (i.e. low debt and plenty of cash). If a firm has to take a loan to maintain the dividend, this is an extremely bad sign. Look for companies that have a high retention rate. Incidentally, it is possible for a firm to have a high dividend yield and a high retention rate.
Earnings growth is not the only growth you should be concerned with. Look for firms that can grow their sales, cash flows and equity as well. And if they can do these things while maintaining their margins and not sacrificing other measures of efficiency, then that is even better. All of these things signal organic growth that is likely to continue.
The dividend is important, but it is not the only thing. And if you accentuate a high dividend yield with other characteristics, you can enhance your performance immensely.