Many investors are investing with the long-term goal of achieving financial independence. Investing in the right stocks and shares can provide you with a reliable income in the form of regular dividends. If you are able to reliably pick these options out, you could be set for the long-term. Here’s what you need to know about picking high dividend stocks.
Look For Consistent Profits
When you are looking for businesses to invest in, one of the most important things to look for is consistent profits. If a business is not consistent and reliably profitable, it is a risky investment and not one that you can rely on for high dividends. It is possible for a business to pay out dividends without delivering profitable growth, but you shouldn’t settle for a business yes that is not expected to increase in value.
Ideally, you want to invest in businesses whose long-term earnings growth is projected to be between 5% and 15%. Going above 15% increases the likelihood of shareholders being disappointed with earnings, and the stock price taking a corresponding hit. Stick to businesses that have a reasonable growth projection.
Remember that while it is a business’s earnings that are the driving force behind profitable growth, it is ultimately the cash flow of the business that will determine the kind of dividends that it is able to pay. You should, therefore, look for businesses that offer strong cash flow generation and are expected to maintain a strong position in the future.
Finally, give priority to businesses that have managed to increase their dividends for five years or more. This suggests that there is a high chance that their dividend payments will continue to grow in size, a big positive for potential investors.
You should stay away from investing in any business with excessive debt, regardless of the dividends that it pays. Determining a company’s debt situation is not always simple but can usually be discerned by comparing its debt to equity ratio. If the ratio is high, then be prepared to start looking elsewhere. It is up to you as an investor to decide exactly what ratio would constitute being too high, but most would agree that anything above a 2:00 would be unacceptable. Ideally, you want a ratio that is about half of this.
Any business with debt will eventually have to pay it off or pay down that debt. When this happens, it inevitably means cash being diverted away from dividends.
Check The Health Of The Industry
This is an often-overlooked factor, but one that is very important in making the right decision. When you are looking for high paying dividend stocks, you don’t just want to consider the individual businesses before you; you also want to consider the health of the industry overall.
Exactly which industries are considered a safe bet, and which are regarded as risky investments, is constantly changing with time. Markets are dynamic and Industries are affected by external forces. If you want reliable, high dividends, stick to Industries with a sunny outlook for the future.
If you make the right investment choice, high paying dividend stocks can provide you with a steady income for a long time. However, make the wrong choice and you could lose your investment. For the best chance of making the right investment decision, stick to the advice we have outlined above.