Over the recent weeks NSE firms have been releasing their full year results for 2008 and most of them have announced dividends for their shareholder. In this bear NSE the only thing we have now is dividends that we can take advantage of. In developed markets its called dividend investing, which focuses on identifying solid companies with a record of growing dividends each year and buying their stocks expecting that it will continue declaring dividends.
One thing that investors need to know when dividend investing is that it’s particularly different from normal value investing, where one invests in a stock considered undervalued with an expectation that it will rise to its true value or higher. And a combination of the two can yield some very good results:
Dividend Investing + Value Investing = Great Returns
Dividend investing focuses on identifying solid companies with a record of growing their dividends each year; and an expectation that it will continue into the future (almost speculative). This sounds so short sighted, but history has proved that stocks that pay constant/growing dividends have always out-performed those that don't.
Dividend investing is usually associated with the bear market since dividend yields are considered relative safe in down markets.
Signs of a Dividend Stock
There are several things to look out for in a stock before considering it a dividend counter:
- Dividend yield doesn’t mean much. dividend yield (annual dividend divided by the current stock price) simply indicate if the stock price is low or high, which is based upon current stock price and historical dividends thus not capturing the actual facts at a particular time.
- A company that has a history of paying a consistently growing dividend is better than one that pays a consistent, but steady dividend. And the consistent but flat dividend is better than a company who has had to cut its dividend.
- Cash flow is King. When it comes to dividend investing net income does not mean much. Cash pays dividends so operating cash flow per share is more important. Consistency of the cash flow is also important. A company that generates a steady or growing operating cash flow is better able to fund a dividend than a company that cannot consistently generate cash. A company’s dividend coverage ratio (operating cashflow per share divided by the expected annual dividend). If this ratio is 1.0 or better, there can be a relatively high degree of confidence that dividends will be paid in the foreseeable future.
- The stronger the balance sheet the better. Stronger here meaning less bank debt. A company with no bank debt has a stronger balance sheet because it can borrow if necessary to support operations and the dividend if need be.
Firms at the NSE that I consider to be dividend stocks include EABL, BAT, Standard Chartered and Total among others. If you're looking for something that pays you a steady income stream, just like fixed securities (bills and bonds) you might be better off with a stock that offers a high dividend.
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