Dividend investing should form part of every investor’s portfolio… and even more so if you are retired. That’s because a selection of great dividend payers can end up paying you a regular income.
But finding the right dividends stocks… ones that will consistently pay you year in and year out…is not so straightforward.
So, today I’ll share two ways to help you compare dividend potential between companies and weed out the good from the bad.
How to find the best dividend payers
Dividend investing tool #1 – The dividend yield
The dividend yield shows us how much a company pays out in dividends each year relative to its stock price. This is always shown as a percentage.
To calculate it, you simply take the dividend amount and divide it by the company’s share price. Then times it by 100 to get the %.
As an example:
Company A, share price R10 and pays a 50c annual dividend, has a dividend yield of 5%.
Company B, share price R50 and pays a R5 annual dividend, has a yield of 10%.
As an income investor, Company B is more attractive. A 1000 shares in company B would pay you R5,000 in dividends alone and that’s excluding growth in its share price…
Another way to look at a dividend portfolio is to consider what would a fixed deposit in the bank pay you… right now, that’s around 9.2% and 9.5% from some banks. Sof if you were to construct a dividend portfolio, you want to make sure your yield and potential growth are attractive enough to outweigh the potential risk that lies in investing in shares.
Of course, this dividend yield is what the company is paying today, so how do you know if it can continue to pay this dividend into the future?,
You can use this next dividend tool to find the answer…
Dividend investing tool #2 – The dividend cover ratio
The Dividend Coverage Ratio measures the number of times a company can pay dividends to its you.
It’s calculated by dividing a company’s net income by the dividend paid to shareholders.
Where:
• Net income is the earnings after all expenses, including taxes, are paid
• Dividend declared is the amount of dividend entitled to shareholders
The higher the ratio – the more cash the company will have in reserve to pay dividends in future, because it is keeping some of its profits.
The lower the ratio – the less cash the company keeps for itself and could struggle to pay dividends at high levels in the future.
Using the example of Company A above, let’s say it had 1 billion shares in issue, and made a net profit of R1 billion for the year. Its total dividend payout is then (1 billion x 0.50) R500 million.
So, to calculate the dividend cover ratio: Net income / total dividend declared: R1 billion / 500 million = 2
This means the company can pay its dividend 2 times with the profit it made in that year. In other words, it can most likely continue to pay that dividend in a tough year.
On the other hand, if the company made only R500 billion in net profit, then it’s dividend cover ratio would be 1.
In other words, there’s very little profits being retained, and the company would struggle to keep up this dividend in a tough year.
Typically, you want to look for stocks with a dividend cover of at least 2.
So when you are seeking out top dividend payers on the JSE, you can use these two ratios to rank companies on their dividend yield, and the sustainability of their dividends before investing in them.
Of course if you don’t have the time or confidence to do the research yourself, then Real Wealth can do it for you. Every six months, we review our Retire Rich with Dividends Portfolio and add new top dividend payers to our current portfolio. If you’re eager to get started, then make sure you get a copy of our latest report out now. It includes the top 3 dividend paying stocks to buy now!
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