Tips For Scanning Attractive Dividend Stocks Amidst The Current Volatile Market

  • Mar 28, 2020 AEDT
  • Team Kalkine
Tips For Scanning Attractive Dividend Stocks Amidst The Current Volatile Market

We once thought the world could not stand together on any single matter with its opinionated members continually fighting on several pressing issues like climate change, terrorism and trade negotiations. But now it looks like that the only battle that remains is the one currently being waged against coronavirus as the entire world comes together to join the same chorus. 

Coronavirus no longer remains confined to the international news columns as it has extensively seeped its way into our day to day lives becoming the talk of the town, perhaps talk of the globe. Our fear takes a colossal shape with the growing number of cases hitting newer regions and wreaking havoc in the already hit areas. 

The Instagram posts of your peers now no longer demonstrate an exotic location, and the twitter feels bombarded by the feeds - all directed at novel Covid-19. As the number of casualties surpasses our every imagination, we realise that sometimes even self-isolation is not so bad. Your living room turning into the office and the solace being your only companion, a mixed state of boredom, doubt and restlessness is experienced all at once. 

According to the situation report by WHO, the total number of coronavirus cases on 25 March 2020 has globally crossed the mark of 0.4 million as 40,712 new cases were added in 24 hours. The growing number of deaths in different parts of the world, especially across the new virus epicenter- Europe tend to cause panic on a global scale.

Volatility and Financial Worries 

The entire earth appears to be grappled by the pandemic that seems to be extending its clutches, choking human lives off the planet. Driven by the panicking state as we return from the grocery centres furnished with the necessary supplies, our thoughts wander to the worst economic implications of the pandemic.

‘Is another financial crisis looming above us?’ is the question that resonates not only amongst the experts but also in our personal cognitive space, troubling our night’s peaceful sleep. 

The stock markets all around the world appear to be mimicking your worst financial fears as the bearish waves shake the market. The Australian stocks plummeted drastically in the past few months sending many investors to jump off the market. S&P/ASX 200 dwindled by over 20% in March alone (Till 26 March 2020) signalling tremendous worry to the investors. As the market volatility increases and the risk surrounding the market grows manifolds, the investors are increasingly shying away from the risky securities.

However, with the cash rates being slashed, resulting in burgeoning inflation, our investments become further complicated. With the inflation chewing away our savings and the equities exposed to high risks, the choice of alternative investment vehicle assumes grave importance in the hour of need.

At such times the dividend stocks present us with lucrative investment opportunities to ensure both the sustained income and growth prospects simultaneously.

With this backdrop let us look at the few tips for scanning attractive dividend stocks:

Choose Stocks With Feasible Dividend Yield

If the attractiveness of the sustained income flow brings you to the stock market, the chances are you might be sorting the stocks as per their dividend yields. Represented by the ratio of the dividend payment to current share price, the dividend yield is the indicator of the income return. It often, behaving as the polestar, serves as the ultimate guide to the investors as they chase the stocks offering highest dividend yield. 

However, sometimes appearances can often be deceptive, leading you into trenches of irrecoverable losses. The extremely high dividend yield can commonly be used as a misleading element to lure the investors into buying stocks who later come cross the sudden cut in the dividends. The dwindling share price can also boost the dividend yield as they show the inverse relationship. Hence, along with dividend yield, other aspects need to be looked at holistically including company’s fundamentals and other financial ratios, past performance, free cash flow and anticipated earnings.

Search for Sustainability Through Ratios

The drive for sustainability accelerates as the companies witnesses closure in their operations owing to the burgeoning pandemic. Amidst such a situation, the pay-out ratio can be used to assess the long-term viability of the dividend income. The ratio between the total dividend paid and the net income demonstrates the percentage of the revenue the company is disbursing as the dividends.

While the low pay-out ratio suggests reinvestment of the majority of the earnings back into the company’s operations, the ratio above 100% highlights dividends being paid over income. An excessively high pay-out ratio signals red alert as the company might cut the dividend in the coming time. 

Interest coverage ratio (EBITDA/ Interest Expense) also pinpoints at the solvency and thereby at the sustainability of the business giving a clearer picture of the stability and price-efficiency of the business operations.

Check Numbers For Gauging Financial Health Of The Company

Warren Buffett quotes, “If a business does well, the stock eventually follows”. The positive stock movements and the market rally may drive your impulse to purchase the stocks quickly. However, at the end of the day (or probably months or year), it is the market performance of the company that eventually matters. 

Amidst such volatile scenario when the stocks are regularly experiencing the downslides, the investors are trying to avail the huge discounts at which the shares are trading currently. By comparing the Price-to Earning (P/E) ratio, the investors can wisely undertake value investment. The price-to-book value also is an important guiding light for investors who look for long term investment. 

The sector and Industry Matters

While the performance of the stocks and sustained income flows heavily relies on the company, but the industry where the company operates also makes an impact. Some sectors are simply more exposed to the risk compared to the others.

The utilities sector typically involved in the generation of services related to basic amenities do not generally witness extreme risks amidst economic and market volatility. Similarly, the telecommunication sector owing to the large-scale adoption of the necessary facilities in our daily lives, is relatively cushioned against the market shocks. Real Estate space offering potential dividend stories also presents other opportunity area. Thus, risk-protection during dividend stock selection is further accentuated by the stability of the industries in the existing turbulent market scenario.  

Bottomline

The markets crashing down amidst the coronavirus outbreak has exposed the world to the fact that the macro environment can anytime use its whip to torment the market situation. However, times like this also presents myriads opportunities, as many investors leave the quivering boats. As the drive for value investment and risk-averseness simultaneously occupies the investor’s mind, the dividend stocks can be leveraged to satisfy our budding investment goals. However, as you take baby steps into the equity market, the eyes should not be blinded by the large board of ‘consistent income flow’ bragged by the dividend stocks. The precise analysis through accessing financial figures, market scenario and industry position is necessary before your hard-earned bucks take up the journey amidst the rocky situation.


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