- Dividends are among the most important considerations for investors since they provide a steady source of income.
- However, investors must also understand that there is no single dividend share that is the best for all investors.
- While looking for dividend stocks, investors should search for companies with long-term expected earnings growth, strong cash flows, and low-debt-to-equity ratios.
Dividends are among the most important considerations for investors since they provide a steady source of income, especially under challenging environments and low interest rates. Therefore, stocks with strong dividend yields generally have greater-than-average appeal. They also offer inflation protection in a way that bonds do not. However, investors should not get lured into ‘dividend traps’ by assuming that the well-known dividend-paying companies are always the best value.
However, investors must also understand that there is no single share that is the best for all investors. High-dividend-paying shares are not good always. A stock’s dividend yield might be on the higher side due to a significant fall in its stock price, implying financial trouble that could impact its ability to deliver future dividends.
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READ MORE: Which are the top 5 ASX 200 dividend shares?
Stocks that could be good bets for investors
While searching for stocks that are best for dividends, investors can look out for these features:
Earnings growth expectations – Investors should look for companies with long-term profitability and earnings growth expectations in the range of 5% to 15%. The companies that have shown consistent growth on an annual basis should be selected. Investors can pick companies whose long-term earnings growth expectations are between 5% and 15%.
Healthy cash-flow generation is critical for companies to keep paying dividends year after year.
According to experts, a minimal five-year track record of strong dividend payouts indicates continued dividend growth.
Low debt levels – The companies with high debt levels should be avoided. The firms with debt-to-equity ratios higher than two should also be avoided.
Broader sector trends - It is also essential to evaluate a company based on broader sector trends to ensure chosen companies are positioned to thrive. The evaluation is critical in holding a more holistic approach towards the future performance of the company.
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For instance, an iron mining company may be doing well, but a possible decline in commodity prices may impact the stock prices. It can influence the dividend payout of the company as well.
Similarly, aerated beverage industry might have performed on a strong note in the past, but these firms may have challenging years ahead with consumers becoming health conscious. So, investors need to be mindful of broader sector trends before going ahead with the stock picks.
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Dividend stock screener can help
Investors can also opt for a dividend stock screener and pick up stocks matching their requirements. A stock screener is an automated digital tool, which allows traders to filter stocks based on a particular criterion. The tool helps keep track of specific stocks during a trading session. It helps in cutting down on search time.
The bottom line
If you plan to invest in stocks with a track record of paying dividends regularly over the years, search for companies with long-term expected earnings growth between 5% and 15%. Strong cash flows, low debt-to-equity ratios, and industrial strength are the other key factors that can help one pick the best bet.