The most excited part of owning a stock is to witness the passive income starting to work and filling your pockets. The only possible cash flow when you hold a stock is when the company paying dividend. Remember, no business is running to make the stock holder richer. If the stock pays you dividend its a call for you to stay. Which stock will pay you dividends for decades? What are the numbers you should be looking for, to build a perfect dividend portfolio?
- Growth in Cash flow of the business
- Profit Growth
- Payout ratio
Cash flow of a business is simply the cash coming in as positive and vice-versa the negative. Apart from financing, Investing, operating the free cash flow is what we are most concerned about. Unlike net income, free cash flow is a measure of profitability that excludes the non cash expense of the income statement. FCF would reveal a serious financial weakness that wouldn’t have been apparent from the income statement. The positive number evaluates how likely the company will be able to pay the shareholders. Focus on increasing cash flow over time or 8 out of 10 times with a positive FCF. FCF may summarize the performance of the business. If current year’s flow is negative dip into the report why the numbers are red whether it’s a healthy move by the organization or is signaling to avoid the purchase.
The company pays you from the profits, which it makes every quarter or a year. No organization would pay you from its pocket for you to stay. If the result is not up to the mark and still paying, fishy it has to smell like. The rise in revenue corresponding to that of profit margin is the way to look for growth even when the margin is maintained. If the profits and cash flow are rising the dividends should follow. A company that isn’t making profit is a company that is going to say “bye-bye dividends“.
The payout ratio tells about how much the company has paid from its profit. Dividends from a growing business will be low because of serious expansion and capital needs. A matured profiting company pays a lot of money if there is nothing left to grow or when it’s a slow grower. The number is expressed in percentage of the quarter’s or year’s profit, when it exceeds 100% its time to think there will be a serious cut or business loss that will shake the shareholders and left with no money after years of accumulated profits. 0.5 to 0.7 is a reasonable number which also signals that the dividends can go on, letting the business survive.
Don’t trust your EX
If the money is invested for a whole long year for just a week of dividend issue. The ex-date is when you are eligible for a dividend. People think if they get in at the Ex-date they are eligible for dividends. The truth is your purchase takes T+2 days to settle and come under your DP number, in between the seller deserves all the dividend and left out with the trading charges. Whatever, stay a day ahead of the ex-date.
It’s subtle the price adjusts to the exact amount issued. At the ex-dividend date traders come in just to scoop up dividend gains. The exit place is where the price drops and that’s inevitable.
How to build a Dividend portfolio?
- Stop fishing only the highest-yielding stocks which are recipes for disaster. The 2008 crash says it all.
- Stocks with high yields seems too good to be true are disasters waiting to happen.
- The returns after the tax matters. 15% of the distributed dividend should be paid as tax, The finance act of 1997.
- Utilize the maximum return potential by picking stocks which does good both in dividend criteria and investment criteria.
- Its okay to include sharks paying high dividends and remember that increases the risk because of tandem movement. Don’t over fill the high yielders, add them only to increase the overall return significantly.
How you benefit?
- Start by withdrawing cash lesser than the annual dividend return of your portfolio.
- Always sync your yielded cash with your day to day expenses where the bank mandates automatically nullify your payables.
- You can sell shares to get more cash in hand unless that doesn’t affect the next year income significantly.
- Plough the money back into buying additional stocks when you feel not more dependent. This can compensate the earlier withdrawals.
- At a year buy minimum of a month’s expense worth stock at a discount price.
Companies increasing dividend every year or follow a trend of increasing dividends are confident about the business’s capability of generating more revenue. Those are the kind of companies stay consistent in paying.
You can also design a portfolio which will pay you every month, but this demands a lot of time and data gathering to find what all are the stocks paying you on quarterly or monthly basis. This is a passive kind of salary for the work you did long time ago.
Combination of Capital appreciation and Dividend Yield
The portfolio A Yields 5% with a 3% capital gains and the portfolio B which yields 2% and a 8% capital gain, withdrawal every year. Withdrawal including the sale of the stock ended up doubling in the 20th year where the A set struggling. This implies high yielding stocks aren’t the way to sustain long, a combination of well parked money yields you more than what the sharks do.