December is related to window dressing phenomenon. 2020 will be end, thus many company will distribute their dividends. This time we will discuss dividend hunting strategies. Dividend hunter, consider the following tips!
1. Don’t Just Look for Stocks that Love the Highest Dividend Yield.
Imagine a company named ABCD is transacted on the market at a price of 1,000 / unit. ABCD will distribute a dividend of $10/ unit share. Then there is another company, namely WXYZ, whose price is the same but provides a dividend of $5/unit share.
At first glance it looks very tempting to choose to buy ABCD shares. Because the dividend yield is greater than WXYZ. However, if you are an investor, you should be even more careful. Moreover, when looking at this phenomenon of high dividend yields.
You are advised to watch for trends in price movements. If the price trend is down due to temporary negative sentiment, you may decide to buy a company like ABCD.
However, if the price drop was due to a change in the company’s fundamentals for the worse, this is clearly a sign for you. The reason is that if your investment period is long, the continuing downward trend in prices will only erode your entire capital gain.
2. See the Cash Dividend Pay Out Ratio
You must be careful in interpreting this ratio. It cannot be swallowed raw because it can be misleading. This ratio is strongly influenced by many factors due to the distortion of EPS triggered by several things. Such as corporate actions which include buybacks, acquisitions, divestments and many more.
To get a clearer picture of dividend sustainability, investors should examine the cash dividend payout ratio as reflected in the percentage of the company’s free cash flow that was paid out as dividends during previous years.
3. Look at the increasement of dividend
If the dividends distributed by the ABCD company continue to increase, then you can say that the issuer is indeed worthy of investment. This is because the increase in dividends also indicates that the company is able to print and increase profits consistently.
Companies like this deserve to be collected for a long time because they continue to grow. When there is a price correction and just because of a momentary sentiment without affecting the company’s performance, the shares of these companies deserve to be average down.
4. If you already enjoy dividends, don’t forget to invest again
When you get dividends from a company, try to reinvest it again. You can go to the same stock if you see that the prospect of the company is still promising according to your investment time horizon.
However, if you see other opportunities, the dividend yield can also buy shares of other issuers that are more promising, fundamentally good, with cheap valuations and good growth prospects.
The proceeds from capital gains and dividends should be invested again, not drawn for spending for non-urgent needs (unless there is an urgency), so that you can get multiple returns following the principle of compounding (interest-bearing).
For your information, seasoned investors like Warn Buffett are the type who are eager to invest their money again, you know, from capital gains or dividends. This compounding principle is what ultimately succeeded in making him into the ranks of the richest people in the world.
Read now: A Guidance of Dividends and Dividends Investing (2)
