Dividend stocks aren’t necessarily the flashiest investments; they don’t get headlines on news channels like many of the market’s growth stocks. Often, dividend stocks are “boring.”
But getting money deposited into your account for doing nothing other than holding shares of a company is a feeling that’s hard to put into words. When wielded correctly, dividends are powerful financial tools that can turbocharge your investment returns or fund your living expenses.
Hundreds of stocks pay a dividend, a company’s way of saying “thanks” for being a part-owner. However, most of them flame out, eventually cutting their dividend payment when the business goes awry. Make sure that your dividend stocks have these three traits, and you will likely enjoy years of easy money.
1. Revenue growth
This may seem obvious, but it goes deeper than “sell more products, pay more dividends.” Consistency is crucial both in life and business, and many companies struggle to raise their revenue yearly.
Industrial companies can see their revenue drop when the economy struggles, and oil companies can experience ups and downs with oil prices. A technology company can grow like wildfire until a newer, more high-tech competitor hits the market. Steady revenue growth is not easy to accomplish over the long term, so hold onto the companies that can manage it.
Consider looking for companies that sell products that are purchased frequently, regardless of the economy, and have strong brands that empower them to raise their prices over time. Colgate-Palmolive has paid and raised its dividend for 58 consecutive years because consumers have been buying its toothpaste for generations. Growth doesn’t have to knock your socks off; you’re just trying to move the ball steadily forward.
2. A sturdy financial foundation
Next, you want to invest in financially responsible companies. You’ll want to make sure that the company can afford to pay the dividend, so look at the dividend payout ratio. Some companies can get away with a higher payout ratio than others, but typically, I like to see a company spend 70% or less of its profits on the dividend.
You also want to ensure that the business doesn’t have too much debt. Companies with a lot of debt pay a lot of interest, which is detrimental to a business’s health. Checking a company’s credit rating with agencies like S&P Global or Moody’s will allow you to see whether they rate a company’s debt as “investment grade.” Companies have to worry about their credit ratings just like consumers do.
Investing in companies with investment-grade credit ratings and a reasonable dividend payout ratio will help you sleep well at night owning them.
3. A commitment to treating shareholders right
The companies that have grown consistently over the years and maintained strong financials are small clubs. The S&P 500 is an index that contains the 500 most significant, most dominant, and longest-standing companies in America.
Yet, just 67 have raised their dividend for 25 consecutive years, a club called Dividend Aristocrats. If you raise the bar to 50 years, the club shrinks further, to just 39, a group called Dividend Kings.
A dividend becomes part of a company’s culture, its DNA. Many investors buy shares of these companies solely because they want an income stream they can depend on and that will grow each year. Management teams for these dividend stocks are well aware of this, so they are a great starting point if you’re looking to build a portfolio of stocks that will pay you.