Drooling over dividend stocks? Here are five points to keep in mind

Dividend is generally defined as a reward that a company gives to its shareholders in form of cash. As a result, investors are always in search of dividend-paying stocks as these can ensure a steady stream of income. Dividend stocks have lately become all the more attractive as the COVID-19 pandemic has fuelled income uncertainty. However, investors should have a proper strategy in place while selecting dividend stocks to make the most out of them.

NOTE: - High dividend-paying stocks are not always good for all. It is also possible that a stock’s dividend yield might have increased on account of a sharp fall in its stock price. In such a case, it implies that the firm is facing some financial trouble, which could in turn adversely impact its ability to deliver dividends in future.

On this note, let’s discuss key things which can be considered by investors while searching for dividend stocks:

Consistent profit

While searching for good dividend stocks, investors should focus on companies with a long track record of delivering consistent profits on an annual basis. Many experts advise to select companies with earnings growth expectations in the range of 5% to 15%.  A minimum of five-year track record of healthy dividend payouts indicates continued growth of dividends.

Cash flow

It is critical for companies to maintain a healthy cash flow so that they can keep paying dividends in the coming years. A company which is growing organically is most certain to increase its dividend with time. On the other hand, if a company’s growth is being fuelled by high-risk investments or global expansion, then its dividend could be less certain.

Debt levels

Experts always advise to go for companies with low debt levels. It is always better not to invest in companies with debt-to-equity ratios higher than two. Piling on debt in order to maintain the company’s dividend record is not considered a healthy practice.

Sectoral trends

Investors should also analyse a company on the basis of broader sector trends. It can provide them with more holistic approach towards the performance of the firm in the coming days. For example, a metals & mining company may be a top performer currently, but a possible fall in prices of commodities can have a negative impact on its share price. This can ultimately have a negative bearing on its ability to pay dividends to its shareholders going ahead.

Dividend stock screener

A dividend stock screener is one of the best tools to select stocks based on your requirements. This automated digital tool allows traders to filter shares on the basis of specific parameters. Investors can employ this tool to track particular stocks during a trading session. In addition, they can save on their search time by using this tool.

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