When you invest in shares there are two things that can make you money - capital appreciation as the share price rises. And dividends putting hard cash in your pocket.
Most investors focus mostly on capital appreciation.
But the fact is dividends can make you massive returns.
If for instance you bought Adapt IT in 2009, you'd have paid 44c per share. Since then the company has paid out 64.74cps in dividends - a return of 147% from dividends alone.
Based on the current dividend of 13.7cps, you'd make 31% on year original investment THIS YEAR ALONE. If that dividend grows by 20% to 16.4cps, you make 37.4% on your original investment in the following year - from dividends alone!
What investors should look out for when investing in dividend payers
The ‘Dividend Yield’ is a way to measure the size of a dividend compared to a share price.
If a company has a 100c share price and a 2c dividend it has a dividend yield of 2% (2 divided by 100).
If the company hikes the dividend to 5c in the following year its dividend yield will be 5%.
Now, you can compare that dividend yield to the interest rate you get on cash – for an indication of attractiveness. But remember – the company has the ability to grow the dividend – whilst the interest rate rarely fluctuates more than a couple of percent.
You can also compare the dividend yield to the average for the JSE.
At the moment the JSE averages a 2.81% dividend. So a dividend above that pays more than the average. A dividend yield below that isn’t necessarily bad though… If that company manages to grow its dividend 20%, or 30% on a consistent basis, the growth you’d get on the dividend would soon outstrip that of most other shares.
A recent study proves this single metric is the most important aspect behind dividend shares
Whilst you might be interested in looking at the highest yielding dividend shares on the JSE – it’s a waste. You see, that is historical information. There’s no way to know from looking at the current dividend yield if the dividend in the next year will be higher, lower or the same.
You need to consider DIVIDEND GROWTH.
Dividend GROWERS beat all other shares
Basically a study published on RealityShares.com
proves that shares with growing dividends beat shares that have flat dividends, no dividends, or shrinking dividends over the long run.
And the outperformance is massive.
So – how do you spot a company that will see growing dividends?
Three indicators to look out for a dividend grower
Dividend grower indicator #1: Earnings enhancing acquisitions
Companies that do acquisitions which add profits to their bottom line from day one are usually able to grow profits faster than their competition. And if they do acquisitions by issuing shares – they are often in the position to pay investors ever growing dividends.
Dividend grower indicator #2: Shrinking debt levels
When a company has a high level of debt, and it is paying off most of that, it will have lots of spare cash soon. It can use some (or most) of the cash it used to pay towards financing and interest as dividends to shareholders.
Dividend grower indicator #3: Strong fundamentals
If a company is strong financially, it is in a good position to grow profits, shrink debt and pay you a dividend.
But how do you measure this?
There are many ways – one that I like to use is called the Altman Z score. It is a scoring system that you can use to rank how strong a company’s finances are. I won’t go into it here – it needs a full article on it’s own.
Considering this, I’ve just uncovered a small cap share that’s set to grow it’s dividend big time in the coming six months.
In fact, I expect it to grow its full year dividend by 200% or more…
And it won’t be the last growth either.
If it’s share price doesn’t move – it will be amongst the five top dividend payers in the penny share universe…
It’s all on the back of the company paying off a couple hundred million in debt, sales going through the roof thanks to the commodity it sells heading upward and very efficient use of its assets…
Here’s to unleashing real value