Friday, November 30, 2012

Rules to follow before investing high dividends stocks


Buying stocks with high dividends is very much important for a long term benefit. A dividend is a share of the profits that the company pays to its shareholders. Our goal is to gradually build a portfolio of stocks with high dividends with a good performance for us. So, I do not position to seek a gain in the short term but to generate regular dividends over the long term.

 Why should we focus on this particular investment strategy? The reason behind this strategy is to make passive income each year, a yield higher than 3% of life insurance ... and enjoy the low cost of current actions. Selection of companies is paramount! You have to follow certain conditions that I validate whether they are eligible:

 Check whether dividends were paid for several years without interruption:

This is the first and foremost criterion to verify. The payment of dividends is much important usually it is decided one year prior. Therefore ensure that they were paid on a regular basis for many years.

 Check for whether the dividends are growing:

 The initial dividend is of course interesting, but its growth is even more interesting for us. In the long term, an action that has a yield of 3%, which increases each year by 10%, will quickly defeat an action that has a fixed return of 6%. This is the power of growing dividends, like compound interest, every year they bring back more passive income.
  
Analyze the financial data of the company: 

 Some questions should be ask about financial data of recent years: Is the revenue increases ?,If the profits increase, does especially where they come from? To find out, it is important to calculate the net operating income is the prime indicator to consider. Operating income takes into account the income and expenses related to the operation of the business while taking into account net financial expenses, financial income and extraordinary.

 For Example: if a company has a negative operating result and has a net positive, then it should be understood that the latter is obtained by the sale of an asset, for example a machine (exceptional items) or financial income (financial). The interest is whether the company can generate long-term benefits of its exploitation (healthy society) rather than non-recurring activities (sale of assets, financial products ...). Finally, it is worth checking the debt of the company. Too high debt will mean that a significant portion of the profits will be used to repay creditors. The remaining profit will perhaps not sufficient to ensure the payment of dividends.

 The dividend payout ratio should not be too high:

 This ratio is calculated as follows, total dividends divided by net income. It should not be too high for the company retains a portion of the profits to invest. The remaining investment capacity will enable its development. Ideally this ratio should be less than 50%, however in practice if it remains below 100%, while investment capacity remains available.

 Choose future business and diversify its portfolio:

 The important part of this step is always to target the long term. What are the growth sectors? Health, food, energy ... All that we cannot do without and which constitutes basic needs. We should not put all your eggs in one basket so diversification in these areas is needed. Once all these steps validated you can be confident in your savings plan and collect your dividends every year! I would try to make a selection of companies in a future article soon.

 I hope these tips will serve you, tell me what you think of this approach in the comments.

1 comment:

  1. Good post, one more thing to check is the debt level of company. If the company has high debt and paying dividend something is wrong.

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