High growth stocks are fantastic investments for investors who like capital growth. When the company grows, their investment can grow multiple folds over time.
However, it also carries with it, higher price fluctuations.
Some investors do not want that, and would instead, prefer a more stable and consistent cash flow from their investment…
Fortunately, there exist companies that can provide consistent dividends/ cash flow to this type of investors who prefers passive income investing – dividend companies.
Now, how do we find high dividend stocks?
One of the commonly mentioned criteria in articles when it comes to finding the best long term dividend stocks , is high dividend yield.
Let’s take AT&T (NYSE:T) and Century Link (NYSE:CTL) for example.
Both are industry leaders in the telecommunications sector in the United States and have been providing network services and TV bundles for their clients for many years.
As their subscription services have been generating good revenue, they have been paying dividends to their shareholders.
Looking at the table below, Century Link seems like the better choice than AT&T if we focus on dividend yield alone, with their yield standing at 12.27%, which is much higher than AT&T’s 5.44% yield.
But, is high dividend yield alone enough to determine whether this company is good for dividend investing?
Unfortunately, not, as they are a few more things that we need to see before deciding they are the best dividend stocks to buy.
1. Dividend Track Record
Firstly, let’s see if they have a dividend track record.
From the table, it seems like both companies have been paying dividends to their shareholders consistently for the past 10 years. In this case, both companies have passed the first criteria as good dividend companies.
2. Dividend Per Share Growth
Receiving dividends every year is always happy news for shareholders.
However, for investors who depend on dividend to support their living expenses, they would have another thing to worry about. Their cash flow must be consistent AND growing in tandem with the inflation.
Referring to the same table, we can see that both companies have been paying stable dividends, with AT&T’s growing year on year for the past 5 years at the rate of around 2%; slightly faster than US inflation rates.
However, Century Link’s have remained flat for the past 5 years – not exactly what you want if you’re looking for dividend growth investing
3. Dividend Pay Out Ratios
You have been receiving stable and consistent salary for years now (in tandem with inflation too), when suddenly, your boss tells you that he has actually been paying your salary from his own pocket, and will now have to reduce or worse, stop paying you any salary, because he can no longer afford it.
How would you feel?
As an investor, there is always the possibility of companies suddenly declaring, there are no longer able to issue any dividend moving forward.
So how do we avoid that?
We look at Dividend Payout Ratios.
Dividend Payout Ratios = Dividend Paid / Net Income
If a company is paying based on the net income they make every year, that would be ideal.
However, if the company pays more dividends than what they make in a year, it is highly likely that they have been paying out of their own pockets.
In the long run, they will not be able to keep up, hence, investors would stop receiving dividends at some point.
Referring to our examples again; it is rather obvious that AT&T has been paying dividends with the income they have been generating. Century Link, however, seems to have been paying more than what they make, with their pay out ratios consistently higher than 100% and putting their dividend sustainability into question.
To summarize, it is important to look at a company’s dividend track record, growth and sustainability over 5 to 10 years, not just their dividend yield.
Companies that meet all these criteria would be some of the best dividend companies you can find and are suitable for investors who intend to build a portfolio of consistent dividend or passive income.
What’s even better?
WealthPark has made this process painless for you by listing everything under the Star Chart, so YOU don’t have to go downloading and scrolling 5 to 10 years’ worth of financials, for dividend companies that may or may not turn out.
It’s FREE for a week! (if you are not already a Premium subscriber) So why not use this opportunity to check the scores of your dividend companies and even generate your own list of stocks that pay dividends?
By now, you may be wondering, how is Century Link able to pay out more dividends than what they make?
In our next article, we will be sharing one more critical criterion in dividend investing, which determines its sustainability and whether or not you will continue to receive passive income.
Stay tuned to find out more on how to invest in dividend stocks !
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece do not have current vested interest of the company. Please consult a competent professional for expert financial, or other assistance or legal advice.