The fastest way to value an income stock
Investors are looking for safer investments that will give them some guaranteed income as well as long term capital gains. When you aren’t sure in which direction stocks are moving, and the yields you can earn on CDs and Treasuries are practically null, a smart place to be invested is in stocks with a strong history of dividend payouts.
Our modern world function with clean water and energy. Utility stocks offer consistent income for investors. Utilities have paid steady dividends to shareholders for decades and this trend is not likely to end any time soon. Utility stock prices have remained relatively stable over time which makes them a good choice for conservative investors seeking higher income.
Like utility stocks, preferred shares pay high dividends and remain stable in price. Preferred offerings also provide greater safety for investors. Preferred share holders receive their money before any common stockholders when a publicly-traded company declares bankruptcy.
Are not guaranteed by the U.S. government but they pay higher rates of interest. The safety of these bonds will vary with the financial stability of the issuer but any bond (rated BBB or higher) is considered investment grade for investors with a moderate risk profile.
Dividend Stocks are one of the most powerful investment vehicles for building wealth. Further, dividend payouts are passive annual income that can go a long way to support your retirement lifestyle.
The principle goal of a business is to earn money for the shareholders. All of the other things that a business does with its cash ultimately lead to the ability to pay money to the owners. Earned income from dividend stocks, over time will help you build-up a diversified portfolio and that will provide you with enough income to support your lifestyle.
When passive dividend income combined with interest income and other types of income exceeds your expenses, you essentially become financially independent.
If you bought 15 companies paying you dividends and those dividends grow each year at a rate that exceeded inflation. And you combine that dividend income with other investment income, rental income and your employment income or business income, then your financial situation becomes quite secure.
Build Your Dividend Income Over Time
Dividend income is not only for pensioners. By diligently saving or reinvesting dividends over the years you will begin to build a substantial dividend portfolio.
Income from dividends are more stable than stock market returns because the markets are volatile going up and down. There are dozens of businesses that have increased their dividends to shareholders every year for decades. If you continue to invest new capital and reinvest dividends, you can assure yourself of healthy dividend growth in the future.
Smart dividend growth investing is purchasing dividend stocks that increase their dividends over the years whereby you continually will receive income from these companies.
This strategy earns you income that will grows exponentially each year and simultaneously builds wealth for the long-term.
When a corporation makes a profit, they have several options. They can reinvest it to expand their business, save it, pay down debt or return it to shareholders as dividends or share repurchases. Companies use their profits for a combination of these. Many public companies pay regular cash dividends to shareholders. Shareholders have the option of using up the earned income as current expense or they can reinvest it back into the company and buy more shares. Additional share can be held indefinitely, increasing your income over many years.
Growing your dividend investments is not only about with how much passive income your shares give you but also how quickly that passive income grows. Many companies increase their dividend payments every year, meaning that each year’s income is larger than the year before it. Several companies have increased dividends for 10, 25, and even 50 consecutive years in a row and the trend still continues. Some people look at a dividend yield and assume this will be their total rate of return. That is not the case. If a company pays $10 in dividends per share this year, $11 in dividends per share next year, $12 in dividends the third year then the dividend payouts are clearly compounding and your earned income growing!
Dividends are not the only gains you achieve from dividend income stocks. As the value of the stock price increases you also have capital appreciation gains.
Many brokerage firms allow you to automatically reinvest your dividends leaving very little maintenance for you the investor.
Dividend Income Reinvesting
The goal of dividend income reinvestment is to build income and wealth at the same time. A company has control over how much it pays in dividends but the market determine the stock valuation price at any given time. The company growth and dividends payouts are the primary focus for dividend growth investors. Stock prices fluctuate, going up and down but a disciplined company can grow its dividend year after year for decades. Dividend investor should try to pick good companies to invest in at reasonable stock valuations.
Reinvesting your dividends back into the company will allow your income growth to compound and the results over time will lead to astronomical growth of your net worth.
Eventually an investor can live off of their income rather than reinvesting them when enough shares are accumulated and your passive income sufficient enough so that you need not sell any of your shares. In this way investor can live off of their accumulated wealth indefinitely while continuing to grow their net worth.
The dividend growth strategy takes time and discipline to develop. You will need to identify companies that will provide good returns over decades. Investor ideally should build up a diversified portfolio of several dividend-paying companies. Some good selections of companies might last throughout the entire span of an investor’s life.
There is not any perfect formula for finding good dividend growth companies for your portfolio. But there are general principles that investors should follow.
Good dividend growth company must have products or services that will be relevant for many decades to come. Time value is important to allow passive income growth thus it’s wise to look for companies that are going to be around forever.
Companies should have unique products that separate them from competitors.
Companies should have a strong balance sheet. This is the hallmark of good dividend investment because it says the company is financially viable and strong enough to survive and grow.
Look for companies where the total rate of return will be equal to the dividend yield plus the sustained dividend growth rate. Some investors like high-yielding stocks with lower dividend growth while others like lower-yielding stocks with higher dividend growth and some prefer a mix of both. Keep this basic guideline in mind when selecting companies for your portfolio.
Buy the company’s stock at a reasonable price. A quality company can be a bad investment if it is over-priced relative to its fundamental value. Investors who buy shares in an overvalued company are more likely to have less returns than the sum of the dividend yield and dividend growth. But if you buy quality undervalued companies at reasonable or depressed prices, your returns may be greater than the sum of dividend yield and dividend growth.
Investors should be able to understand the company and how it functions. Investing is about individuals taking control of their finances. Understanding the companies that you invest in is an important component of taking financial control.
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2014 Is the Year of Dividend Growth