If you are cash lover this strategy will definitely make you happy. You can receive dividends at the end of every quarter issued by the company. This helps to get real holding of wealth and thus become a safe investment.
So isn’t it great that apart from your salary you start receiving cash from the company for which you don’t need to work? Simply buying stocks and company will share its profit.
But it is not so easy as it looks. Though you need not work for the company you need to work, analyzing the best stock for dividends.
It’s a long-term investment used along with value investing strategy where undervalued stocks are bought and kept to receive dividends at an equal interval of time.
You need to analyze company thoroughly which helps in scrutinizing, to categorize top ranking company who generates real cash and stay out of debt. The cash flow statement should show that company is able to generate real cash rather than leveraging up the balance sheet.
Did you find that difficult? Let me elaborate it for you.
If the company borrows or makes debts to make dividends then it’s a big red flag for that company. If the Company increases its debt in a duration of time required to pay dividends then there is something fundamentally wrong in the business.
You need to understand their balance sheet and analyse is it worth of investment.
Dividends cannot be inflated. Quarter after quarter you will receive money from company profits. This is the safest game in the world of trading, involving only minor risks.
If you are good in fundamental analysis, easily understand the balance sheet and can understand business this strategy is for you.
All you need to do is have a deep understanding of the business, their functioning and analyzing the process of their cash generation and select those companies who have business with long corporate history and have an edge over the market.
You need to know the fundamental of liabilities and debt and go thoroughly through the balance sheet and estimate the cash flow and should be aware of the date of announcement, date of delivery and ex-dividend date.
You need to analyze dividend yield and dividend coverage ratio, dividend payout ratio and look up for the percentage dividend offered by the company. The investor usually follows either high dividend yield approach or high dividend growth approach.
Are you the right person? Who should use this?
Dividend investing strategies are for those who are reluctant in regular purchase and sale of stocks, rather prefer real cash earnings at fixed interval of time. These are not meant for risk lovers and those who want to grow fast, as a dividend is subjected to business policies. One needs to be good at accounting, understanding the balance sheet and source of cash generation. A man with patience will have it as the best choice.
So do you fall in this category? First, analyze yourself and answer the question ”Will this strategy suit your personal habits and requirements”
- It’s a long-term investment, have patience and enjoy quarterly earnings
- Need intense analysis on company fundamentals and proper study of balance sheet
- Need to monitor dates before investing
- Makes you financially independent
- Is a good source of Passive income
- Eliminates market uncertainty
As this involves fundamental analysis you can use this strategy along with Value investing strategy. Here you need to understand the business model, that how the company is generating profit or cash. If you are investing in stocks that only provide high dividends then your greed will ruin all your investment.
Not all high dividend paying stocks are worth of buying.
Observation is what will make you smart investor as it is very well said “Observation is education”