Guide to investing in Dividend Stocks

Guide to investing in Dividend Stocks

Australia is beholding a new landscape with a wide paradigm shift evident in the psychology of the people. The cognitive maturation that happened in the last few months amidst Covid-19 crisis generally requires many years or even decades to materialise. However, the worse of the circumstances often bring out the best in human beings, and the crisis period gives clear testimony for the same. 

While Australia is slowly emerging out of the medical crisis, the woes surrounding the economic crunch still lingers over the country. Meanwhile, the period of the lockdown dominated by the volatile ambience, the long queues outside the stores and the adaptation to the new norms has opened avenues which earlier just surrounded the teatime discussions. Amidst such situation, consumers are shying away from the extravagant lifestyle, and the conservative sentiments have taken over the investors. 

ALSO READ: Guide to Portfolio Strategies and Investment Avenues to Wade Through COVID-19 Crisis

Australian stock market over the past few weeks has been echoing the positive sentiments of the investors and the S&P/ASX 200 on the QTD basis rose by 8.28% on 22 May 2020. The recent turbulence in the dividend stocks is offset by the positive wave of the economic reopening. S&P/ASX Dividend Opportunities Index which exposes the income-seeking investors to the stocks with high yield while ensuring stability and other essential requirement gave the positive return of 8.47% on the QTD basis on 22 May 2020. 

As the need for a consistent stream of investment escalates the investors keenly eye the dividend stocks that could provide steady income along with growth prospects in the future. The interest on the bank savings and other fixed deposits methods highly stands a chance to be counteracted by the effect of inflation. It has escalated the demand for the dividend stocks, which satisfies the ambitious growth goals while not compromising on the regular income flow. 

With this backdrop, let us look at some of the critical considerations that must be taken into account when investing in the dividend stocks. 

ALSO READ: 6 Stocks on the ASX Dividend Charter: FMG, MGR, RFF, MTS, WAX, BKW

Invest in the Quality Stocks 

The reliability of the dividend payments on time is highly crucial for the one making the income-centric investments. The reduction or suspension of the dividends amidst the crisis may backfire the stability plans of the investors, thereby further complicating the financial dispositions.

Covid-19 terribly hit the markets, and the companies registered high complexities in sustaining their cash flows. During such critical times, many were found withdrawing or reducing their guidance and dividends. As the dividend centric strategies primarily involve long-term focus, the blue-chip stocks with a strong balance sheet and having a long-proven track record of growth should be chosen. 

The packaging product-related company, Amcor Plc (ASX:AMC) which had market capitalisation worth $22.67 billion on 22 May 2020, declared the interim dividend of 11.5 cents for the Q3 FY20.  

ASX AMC Announcement

Go for Moderate Dividend yield 

The dividend yield is the primary criteria that govern the lucrativeness of the dividend stocks. It represents the percentage ratio of the dividend paid to the price of the shares. The stock with a high dividend yield demonstrates higher income returns on the investment. While it is evident, that the investors would look for high dividend yield to maximise their profits, the unconventionally high dividend yield may send alert signals as sometimes it indicates that the company is not doing well. 

ALSO READ: 5 Tips for finding sustainable dividend yield stocks

Rio Tinto Limited (ASX:RIO), one of the largest mining firms with the market capitalisation of $34.59 billion, has the annual dividend yield of 6.23%. The other S&P/ASX Dividend Opportunities Index constituents, Commonwealth Bank of Australia (ASX:CBA) has market capitalisation worth $104.53 and a dividend yield of 7.34% on 22 May 2020. 

ALSO READ: Dividend Leaders from IT, Banking and Resources Space

Research on the Dividend dates 

The dividend investment strategy can be steered in the right direction with the aid of the correct knowledge on the dividend dates. The beginners remaining affixed on the different return ratio can fail to take heed of the dividend dates. Thus, purchasing the stocks even before the payment date may make us miss the dividend payment. 

The company declares the ex-dividend date, record date and payment date. While the payment date as the name suggest indicates the day when the dividend will be paid, the record date typically highlights the date when the company marks the investors that are eligible for dividend payment. The clear idea about the critical dates would help in better designing our income strategies.

Pay-out Ratio 

The long-term and depending nature of the dividend investment highly calls for sustainability and safety of the income over time. The dividend pay-out ratio, which is the ratio of dividend paid to income made by the company indicates the proportion of the earning that goes in the dividend payments.

The ratio over 100% indicates the dividends are paid in excess of the spending, and thus in the future, the company is expected to cut back the profits. The low pay-out ratio indicates that the company is reinvesting a substantial proportion of the earnings for fuelling growth. 

Commonwealth Bank pay-out ratio for FY19 WAS 88% which indicates the Company is paying a significant proportion of its earnings to the shareholders as dividends. 

CBA ASX Announcement

Look for Value Appreciation 

The creation of value alongside the consistent flow of income not only ensures regular pay support but also fulfils our future ambitions. It accomplishes the multiple criteria of the value investment, which seeks the enhancement in the value of the equity stocks while also sustaining income. The consistent growth in the stock price is also an indication of the robust organisational performance that promises long-term future of the company. 

Brickworks Limited (ASX:BKW) in the face of Covid-19 has declared an interim dividend of 20 cents per share, which were up by 5% from the previous corresponding reporting period. Over 44 years, BKW stock has given 13% annual return to the shareholders

ASX BKW Announcement

Bottom Line

The future centric investment decisions into the dividend stocks involve careful consideration and strategic planning to avoid the pitfalls of investing. When evaluating the dividend profitability and consistency, the industry and sectors should also be kept in mind along with the technical and financial figures. The reliable sectors that are likely to witness consistent demands are much safer dividend bets compared to the cyclical ones where the markets soar and fall. Besides, the personal financial liabilities and sources amalgamated with the right mix of strategies is critical for ensuring stable growth without panic.

(NOTE: Currency is reported in Australian Dollar unless stated otherwise)

 


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Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

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