In the previous article, for Stock Market Investing, I told you about how to make money with the index fund, today i speak you of How to Gain with the Dividends. The techniques explained in this article are taken from the book of Matthew Paulson Automatic Income.
As in the previous article, we talk about work in the stock market, not for speculative purposes, but rather for investment purposes. The perspective is always that of the long run, so buy and hold. The main goal is not to earn if the stock market increases the price, but rather gain from the detachment of the coupons.
But where to look for the right Equities to make an investment?
According to Matthew Paulson, in S&P 500 Dividend Aristocrats. As you can see from the chart, in a 24-year period, the performance of S&P 500 Dividend Aristocrats is superior of the S&P 500, the 1900% of S&P 500 Dividend Aristocrats against 1100% of the S& P500.
In choosing stocks it is important to select those companies that have a low beta, ie low volatility. The S&P 500 has a beta of 1.0, Securities with a beta less that 1.0 are less volatile. Avoided technology stocks, because they have beta greater than 1.0.
While companies in sectors as utilities, consumer staples have a beta less than 1.0. Because the dividend stocks have less volatility they have a much lower risk than the traditional stock market.
In stock selection in which to invest you have to consider many factors, including the rate of interest that are paid by the companies. Usually the choice must be made on securities that have a range between 3.5% and 6.5%, higher can lead to unpleasant surprises, except for the Real estate investment companies.
Also you have to know what is the ratio of debt to equity, a ratio 1:1 is acceptable. Always compare the debt to equity of a company with the others in the same sector. You should never be considered, as a general rule, companies with a profit margin below 5%.
Many companies have a dividend payout ratio between 40% and 70%, above i suggest you not to invest, except we do not speak of the Real Estate sector. In this case the range moves between 75% and 90%.
Another important factor to be determine before purchase, is the intrinsic value of the company.
The formula is:
Expected Share Price = Annual Dividend / (Cost of Equity – Dividend-Growth Rate)
In summary, the factors to consider when choosing a good investment are the company’s dividend yield, number of years of dividend growth, average annual dividend growth, average earnings growth, dividend payout ratio, debt-to-equity ratio, net margins, return on equity, and fair value estimate.
If you want more details, I suggest you read the book of Matthew Paulson Automatic Income.