Saturday, 24 April 2010

Invest in one that grows!

This is where fundamental analysis comes into play. Investing in a stock (company) that grows is probably more important than one that gives out high % dividend (but does not earn much profit).

On the other hand, there's an article saying that companies that give good dividend yield are generally less volatile than those that don't because fund managers in times of bad market would rather sell off the shares of the company that give less dividend before the one that do if both trades at the same price.

See this article.

Now, the difficulty lies in spotting the good 'chicken' to lay your golden eggs.

In choosing the 'golden chicken', here's some pointers picked up from What To Look for In Dividend Stocks for an Income Investing Portfolio:

- The company should have 3 consecutive years of positive margin.

- Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both. The company should pay out 50% or less of profit as dividend to use the rest in business growth.

Note that the percentage of net income that is paid out in the form of dividend is known as the dividend payout ratio. This ratio is important in projecting the growth of company because its inverse, the retention ratio, can help project a company’s growth.

- Dividend yield 3-6%. Dividends are dependent upon cash flow, not reported earnings.

- High ROE with little or no corporate debt.

Some of these information can be better scrutinized by looking at the balance sheet and annual report of the listed company.


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