What key things should dividend investors be looking for?

 

Dividend income is secure income while investors with comparatively low risk appetite prefer dividend stocks in their portfolio. It is also a good investment from those who don’t want to watch the market every day and still want to secure their investments and make money. If anybody needs to park money for higher regular return, they can park their money into high dividend stocks. The key things that dividend investors can pay heed to –

Quality of business: Investment in high quality businesses gives comfort in terms of stability, growth and profitability. Investment into business that has strong history of solid growth enables companies to distribute profits by giving dividends. One should consider the dividend stocks by long-term earnings-per share growth or dividend growth. The constant dividend also typically indicates for quality of business growth.

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Dividend consistency: Investors prefer companies with long dividend history in the rising trend. Invest in businesses that have higher income that help to ensure that dividends won’t be cut during business downturn. This can be easily analyzed by dividend payout ratios. The rise in dividend in a continuous manner is also a good indicator that company is growing and giving sustainable returns to the investors. One should look for such companies with strong fundamentals and growth records.

Frequency of paying dividend: If the stock reduces its dividend, it indicates that the business has lost its competitive advantage and reinvested the proceeds of the sale into more stable business. Additionally, if the frequency of dividend payout is not consistent, it may mean that the business is not stable. In good time the company is paying while in bad times it is unable to bring growth to distribute profit. Thus, the consistency in general is indicative of the stock being on growth radar.

Reinvestment of dividend: Investors can use reinvestment programs, which would allow them to reinvest dividends automatically without paying commission. With the passage of time, more capital is allocated to the business and dividend payout can continue to increase with growing business. The compounding makes big difference to your portfolio as we can see from following chart.

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Region-wise Returns from Dividend Yields (Source: Financial Times and Société Générale)

Dividend payout ratio: Dividend payout ratio is also one of the important criteria, as higher the ratio means that the company is keeping minimum profits for reinvestment in the business for future growth. More than 100% indicate a concern as company is paying out of its current reserves.

Stability and cash flow: Some entities tend to generate high levels of cash like bank, consumer staple, utility and insurers. Such entities with volume sales tend to have a reputation for generating positive cash flows as compared with companies with small product portfolio. Further, the companies generating strong operating cash flow tend to distribute better dividends to investors as well as indicate a healthy picture from future growth perspective. Such companies are good investment bet from dividend perspective. Companies with decent portfolio of products and poor sales might not be able to generate cash flow as poor performance may be eating away cash flow of good product sales.

Identifying value: Identifying the value is very important. One can make greater return if one can invest for a longer period of time in stable companies that pay consistent dividends and raise those dividends on steady basis. This approach can yield greater return but identifying value is important.

Performance in recession: The performance of the company in the recession should also be considered. The real world data can help an investor find companies who are much less cyclical than others. Investors need to find such companies which are not much affected by recession and manage to reward investors by paying dividends.

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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

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Five reasons to stay positive about stocks

 

What would be the best investment; stocks, government securities or bonds? Most of the investors have this question, whether they should be investing in bonds or government securities to play a safe bet or invest in stocks for higher returns by taking a risk? An appropriate mix of investments should be based on time horizon, financial situation and tolerance for risk. Typically, for the longer investment horizon, the exposure to the stock is best option. Historically, the conservative mix has provided much less growth than a mix with more stocks owing to the following:

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Surplus money over and above primary needs: When you have some extra money lying around, you can invest in stocks and wait to gain better returns. This is important, as you don’t burn through your earnings that quickly. While bonds and government securities give secured or assured returns, investment in stocks help you to create wealth but the key is stay invested and take profits at the right time. It has been proven that the investment in equity class gives you the maximum return, it however is also very risky asset group, as fall in the market erase your gains completely within a very short time. But by staying invested one may ride this downturn. For instance, Ainsworth Game Technology Limited (ASX: AGI) generated a 466.27% returns in the last five years (as of August 15, 2016). But the stock corrected over 17.54% in last one year due to challenging conditions across the globe impacting the stock, while again recovering over 8.29% in the last five days alone. Further, latest drops in interest rates and bond yields have worked well for gathering more momentum towards stock markets.

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FTSE All-World Equity Index (Source: Financial Times)

Investment in stocks rewards dividend yield and capital gain: Investment in stocks helps you earn dividend which is your return on your investment while others reward that investor gets is capital gain through rise in value of your investments. A dividend yield, that is the dividend income you earn on your market investments while capital gains are gains due to the appreciation in value of your investments. Investing in companies with long dividend history is the rising trend. Investing in businesses that have higher income also helps to ensure that dividends won’t be cut during business downturn. Real world data can help an investor find companies, which are much less cyclical than others. Investors need to find such companies, which are not affected by recession and managed to pay returns through dividends.

Invest for long-term: The more time your money is invested, the more time it has to grow. One of the best way to invest for long term is to invest in stocks or stock mutual funds. The investment in stocks for long-term help you earn more than bonds despite the regular ups and downs in the market. It is not a constant straight line up for the whole timeframe. However, it has been observed that stocks have historically offered more potential for growth over the long term.

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High yield being derived from stocks against the bank deposits (Source: ASX)

Withstanding in volatility is a key feature of stock investments: It is advisable not to panic when your stock is falling in values, or there is flow of bad news. From a long-term perspective, the current downfall might be meaningless as market does not move in one direction and there would be upswing in the market. What is generally believed is that one should use the low value or fall in stock value as opportunity to average its current holding or enter into defensive or blue chip companies, which over the time would be paid off. It may be painful time when stock prices are falling but the stock does not have one side movement.  The trend is going to reverse the current scenario and would start moving upward over a period of time. Of course, this goes without saying that the fundamentals and growth recovery has to be borne in mind for such stocks. Nonetheless, one should not panic and sell the falling stocks in haste. This is an opportunity to enter the strong growth stories stocks or average the current holdings of good companies.

Improving economic scenario: Australia’s business confidence has been resilient as per the latest data and the economy has also rebalanced itself from a mining-driven state. At the same time, Central banks’ efforts on monetary policies post-Brexit seem to have adjusted for some turbulence. These together have boosted the shares to some extent.

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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Five reasons why Australian investors are addicted to dividend-paying stocks

Given the ongoing market volatility with cyclical impacts from the commodity prices, many Australian investors resort to stocks that pay decent dividends on a consistent basis. Key reasons for this addiction for dividend-paying stocks is better understood from the following:

Avenue of Income Stream: The investors want to build long term wealth and for this investors accumulate stocks of well managed companies with sustainable business that give them a steady, growing stream of dividends. Dividends are paid from the earnings or the profit added to the reserves. Many Australian companies give better proportion of the earnings as dividends to the shareholders. On an average, dividend payout ratios are generally healthier in Australia as compared to major global market. The investor demands for stocks paying decent dividends to get the income stream are supported over the years ahead as more baby boomers retire and then they focus on the income generation. They are less risk averse and gain patience while investing in the stock.

Linked to Interest rates and Tax benefits: First of all, the low interest rate environment in Australia kicks off well with the dividend stocks and many investors thus have started eying for such stocks in today’s scenario. Australian companies can also attach franking credits to the dividends to indicate the amount of tax paid by the companies already thus saving investors from paying taxes, which averts double taxation. Double taxation primarily means calculation of tax twice, once in the hands of companies and again in the hands of investors. The corporates get encouraged to give decent dividends to shareholders as opposed to irrationally hoarding earnings. The Interest on corporate debt never suffered from double taxation as it is paid out of pre-tax corporate earnings. And all such concessions encourage savings in the face of Australia’s relatively high marginal tax rates.

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Australia dividends and earnings (Source: AMP, Thomson Reuters)

Reflect Corporate Confidence: The high dividend payouts indicate higher corporate confidence about future earnings. The high dividend payouts are generally a positive sign as they indicate earnings are backed by cash flow. The companies give dividends from the retained earnings that is when the profits are ploughed back to the reserves and show the visibility of the future earnings. The stock market also reacts positively to the company which has strong earnings visibility and shows corporate confidence.

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Provide Sense of Security: The decent dividend yields provide security during uncertain times, that is when the market is continuously falling for a longer time, like when there is huge fall in the prices as seen recently in the case of Brexit. The dividends provide a stable contribution to the total return from shares over time, compared to the annual volatility in capital gains. Dividends are good for investors as decent dividends reflect for the good earnings growth, they provide a degree of security in uncertain and volatile times, they are likely to comprise a relatively high proportion of returns going forward and they provide a relatively stable and attractive source of income. The investors trend to carefully watch out for ‘defensive’ ASX stocks. In such scenario, we have seen in the past that stocks of the big four banks, including Australia and New Zealand Banking Group and National Australia Bank, along with companies like Woolworths Limited are considered as source of high yields and income.

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Comparison between deposits and shares (Source: RBA, Bloomberg, AMP Capital)

Many-a-times better than Bank Deposits: Dividend can give better returns than the bank deposits. The investing to get the dividend income can be compared to the investing for income from bank term deposits. Some companies have given steady income to investors as they have consistently given back a significant chunk of their net profits like 25% of the net profit to shareholders in the form of dividends while some bank deposits have given the return of 5%.

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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

 

 

 

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Is the recent surge in global dividends a bit alarming?

Importance of Dividends

Dividends are generally being paid by higher quality companies which have good cash flow, occupy a strong position in their relative industries, and provide stable returns in times of volatility. Additionally, they are attractive to long-term investors who have the capacity to ride out volatility periods as during a downturn they balance the investors’ portfolio by reducing selling pressure.

 

In a stock market, high dividend paying stocks are considered as dividend growth stocks and investors seek to maintain their profit portfolios with the help of balancing growth stocks along with other stocks. However, looking from the other side the story may be a bit different. According to a global equity strategist at Citi Research, investing in companies that pay higher dividends despite falling earnings poses a risk as these dividends are not sufficiently covered by profits earned over a period of time.

 

Latest Global Statistics

In 2016 (year-to-date), the Dow Jones US Dividend Select Index (INDEXDJX:DJDVP) surged by more than 8.54% while the Dow Jones Global Select Dividend Index (INDEXDJX:DJGSD) surged 2.45% compared to negative returns of many equity markets. Within the S&P 500, the top 100 highest yielding stocks have gained 3% this year while those with no dividends have eroded more than 4%.
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INDEXDJX:DJDVP Daily Chart (Source: Thomson Reuters)

 

In the past one year, the world’s listed companies have paid out more than half of their profits in the form of dividends pointing to an unusual situation that indicates widespread economic weakness. As per data from Citi, in two years the proportion of profits paid out as dividends by companies within the MSCI World index soared to 51% from 43% higher than the long-run median of 46%. According to J.P. Morgan calculations, annual income available from the Barcap Multiverse Bond index is 1.7%, a record low level. Also, the firm calculates dividend yield on global stocks as 2.7% and rising to 3.4% with the inclusion of net share buybacks.

According to a recent report from Chicago-based Henderson Global Investors, in the year 2015 global dividends increased by 9.9% to $1.15 trillion with most of the growth dented by strengthening U.S. dollar (reduction of almost $104 billion). Looking ahead to 2016, dividend forecast for the year is narrowed by $10 billion to $1.17 trillion led by cuts in the commodities sector. As a global trend, U.S. and Commonwealth countries pay the highest dividends. Meanwhile, Japan recorded a 19% increase in payouts in 2015 while China posted its first annual decline of 1.5% in dividends.

Global Shift towards High Dividend Payouts

With the past few years highlighting unsatisfactory dividend yields, companies have shifted their focus on being high dividend paying in order to return the maximum possible to shareholders. Notably, energy companies which have been hit significantly by falling oil prices are the ones whose dividends exceeded the profits of these companies. The global trend in recent times reflects that income focussed investment funds have gained popularity as investors are looking at higher return to shareholders.

In 2015, reforms to the Tokyo Stock Exchange’s corporate governance code were also followed by rising dividends. On the other hand, in February 2016 Larry Fink, chief executive of asset manager BlackRock, wrote to chief executives of U.S. companies highlighting the growing proportion of profits paid out to investors and urging each to lay out a strategic framework for long-term value creation.

 


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Australian stocks and dividend analysis

The Australian stock market has rebounded from its February lows and has gained about 9.8% since March 02, 2016 as of May 30, 2016. This indicates that the market is only slightly lower from its 2015 high levels. The Australian companies have paved an attractive pathway for investors while boosting stock prices which is through pushing dividend payout ratio higher. In the past, the companies that paid 60% to 70% of their profits had now increased the ratio to 80% to 90%.

However, there are a few risks attached to this strategy which include benefits to the companies in the short term by diverting the funds from long term reinvesting for future to the shareholders. Also, if the economic growth softens, these companies may not be able to increase payout ratios higher than 90% level. A threat to the Australian companies is higher as according to data compiled by Bloomberg wherein payout ratio exceeds 100% for these companies as with every $100 of profit generated the payout stands at $118 in dividends.

Reserve Bank of Australia recently commented that these high dividend payouts maybe living on borrowed time which in the longer run may pose a threat to the economy. In 2015, Australian-domiciled listed companies announced dividend payments of $78 billion which accounted for 81% of the underlying earnings of these companies and 4.8% of their capitalization as of June 2015.

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Ten ASX Companies with High Dividend Yields (Source: Thomson Reuters)

 


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U.S. Earnings Quarter and Dividends

The 2016 first quarter of earnings season for U.S. companies has revealed some softness for the economy since 2009. However, analysis reveal that this would be the best quarter on record for dividend payments. As per a Goldman Sachs report, with the S&P 500 earnings per share are expected to decline by 1% year-over-year and dividends per share to rise by 4.6%. Furthermore, on a rolling four-quarter basis, dividends per share grew by 7.5% to $43.88, establishing a record level. In 2016, the strongest sectors of the S&P 500 are those which have offered relatively higher dividends and not slashed payout ratios for the past five years.

In the first quarter of 2016, for the entire U.S. stock market, 919 companies increased their dividends, almost 8% less than the same period a year ago, as per a report by S&P Global Market Intelligence. Meanwhile, for the last four quarters, 2,733 companies increased their dividends, 15.3% fewer than in the previous four-quarter period. Interestingly, the dividend yield on S&P 500 was higher than the yield on the U.S. Treasury 10-year note. According to data from FactSet, in the past 5 years the 10-year Treasury note was yielding 1.78% as compared with an average dividend yield of 1.96% for S&P 500 stocks.

All in all, a very prudent approach should be taken at this time to invest in companies which should entail looking at company fundamentals as well as dividend pay-out scenarios.


 

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

Basics of Dividend Investing Dividend Investing Dividend Lists Dividend News Latest Dividend news Uncategorized What is dividend Quality ? What we like about dividends?