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Investing in premium quality dividend stocks is possibly the best way of building wealth over time. However, you should keep in mind that not all dividend stocks are of high quality. It is important for you to research extensively and narrow down your search to the best dividend paying company. Here are five factors to keep in mind when finding the right dividend stock to purchase.
1. Potential for growth
One crucial thing to consider is whether the company has the potential to grow its revenue and sales in the long term. However, making forecasts in stock investing is not easy and you need to do lots of research before investing. The growth of a dividend paying company is affected by the industry it is in, the overall economy, the ability of the management, competitive forces and many other factors. With a growing company, you will be assured of regular dividend payment over time.
2. Dividend history
It is essential for you to check the history of the company’s dividend. Higher dividends are good, but you need to look for high dividends that are growing consistently in your quest for dividend investing. The past performance of the stock or dividend behavior may not be a guarantee for the future. However, a history of the company having shareholder-friendly dividend policies makes it more likely that this pattern will still continue over the years.
3. Dividend aristocrats
Looking at the list of dividend aristocrats is one of the best ways of determining whether the company consistently pays dividends. This label is given to businesses that pay out a growing amount of dividends for not less than 25 years in a row. These companies consistently pay dividends to their shareholders every year and they also increase the dividend payouts gradually over time. If you are looking for passive income, check out these Canadian dividend stocks for 2019.
4. A long tradition of paying a steady and increasing dividend
When choosing the best stocks to purchase for dividend purposes, opt for companies with a history of paying out dividends. In most cases, investors do not want to double their cash within five to six years through dividends. The plan is to see a significant return over time and this means looking for companies that will consistently pay out their dividends for ten, twenty or even thirty years in a row. These are the companies that will give you most value over time and not those with flashy payouts rations over a one or three-year period.
5. Payout ratio
The payout ratio is one of the most important pieces of information to gather before purchasing dividend stocks. Payout ratio refers to the dividend payment of the company relative to the earnings per share. This will determine whether or not the company earns enough money to cover the dividend payout. It also confirms whether the business has the cushion to effectively absorb any drop in their earnings and stills sustain its current dividend payout.
6. Dividend policy
Before you put an order for dividend stocks, take time to look through the company’s annual reports and the management-stated policy regarding dividends. Most of these details will be available on the company’s website and will give you a good idea about the strategy and motivation of the board. Check the stated dividend policies and whether the management pays dividends consistently or whether they consider a share buyback strategy that helps return value to their shareholders.
These are great points to consider when looking for dividend shares to invest in. However, they do not cover all the factors. It is important to research extensively both online and offline and find the right company to invest in. By investing wisely, you will enjoy a passive income over time.