Dividend shares represent an excellent part of the portfolio for generating passive income and additional capital for reinvestment. Although it may provide less return than growth stocks, many “dividend aristocrats” offer an exciting appreciation, and at the same time, their stocks have a significantly smaller price standard deviation. In other words – they are less volatile.
In this regard, it is important to define the meaning of the dividend. We will use the definition from Investopedia, which says that a dividend represents the distribution of part of the profit to the shareholders who are entitled to it. This sentence may seem chaotic, but let’s “dissect” it slightly. The company’s management, which has decided to pay dividends to its shareholders, distributes it from its income. It is essential to monitor the “Payout Ratio,” which we can calculate whether the current dividend is sustainable. The term “dividend yield” is also fundamental. From a percentage point of view, it shows us the annual dividend yield compared to the market price. An exciting company with long-term high dividends is e.g. Altria Group, whose dividend yield currently stands at around 7-8% due to the stock slump. Mostly, the dividend aristocrats are “asset-heavy” companies that operate in the business of oil, gas, real estate, etc.
Dividend hike – dividend growth is a key signal for retaining shareholders and attracting new ones. Every shareholder likes it if the company he has invested in in the long run increases the dividend. Such news are always positive, but try to look into the company’s balance sheet and monitor cash flow to see if the growth is sustainable.
Dividend cut – at first glance, the announcement of a reduced dividend may be a negative signal for investors and is mainly accompanied by a decline in the value and price of the stock. But this is only a short-term aspect. Nevertheless, reducing the dividend for a company can be a solid strategic move in the long run. The company is aware of sustainability and solves problems like how to survive and increase CAPEX, and continues to invest and focus on the company’s growth. A detailed examination of “why companies made a given rate cut” may eventually lead to a positive conclusion.
But not always. Many times, the companies try to avoid such step, because they could not be considered as “dividend aristocrats”, but you as a investor can be one step forward. When you analyse the balance sheet and CF statement, you can judge that dividend growth or payout could be unsustainable. When the management will be forced to dividend cut´s decision, its mostly affects the stock price negatively.
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