What to Look for in a Dividend Stock
Dividend stocks are the basis of a sound retirement portfolio. As Motley Fool says in its best of breed article about dividend stocks, these stocks provide investors with three great benefits.
Dividend payments provide three major benefits to shareholders. The first one is obvious: They put more money in your pocket. If you’re up on your position, that means icing on the cake; if not, then a dividend is a hedge against your current unrealized losses. Secondly, dividend payments act as a beacon for Wall Street and investors, alerting them to the sustainability and profitability of a company’s business model. If a business has consistently paid a dividend to its shareholders and raised that dividend on a somewhat regular basis, then it’s signaling to investors that it has confidence in its long-term business model. In essence, why would a business share its profits with investors if it feared for its intermediate or even long-term profitability? Lastly, what makes dividends such a transformative investing tool is that they can be reinvested back into the same stock. Using your payout to purchase additional shares of stock can supercharge your portfolio and, depending on your time frame to retirement, multiply your nest egg.
But what do you look for in a dividend stock? Higher dividends are better that lower. A long history of dividend payments tells you that the business model of the company is sound. And if the company offers reinvestment of dividends you avoid having to pay a commission in order to gain more stock.
Dividends and Interest Rates
Dividend stocks are an alternative to buying bonds. Power companies typically pay dividends that are competitive with bonds but are stable companies with little growth. Their share prices rise and fall inversely to interest rates. That is because the company has a fairly stable dividend that does not go up when interest rates go up. So, the stock price falls as rates rise. The New York Times reports on how rising long term interest rates are depressing the market.
An increase in long-term interest rates rattled investors on Tuesday, nudging major United States stock indexes lower for the second day in a row. Traders around the world have been selling off government bonds in recent weeks. That trend accelerated on Tuesday, bringing down bond prices and, in turn, driving up the benchmark United States bond yield to its highest level since late November.
The point is that when rates go up stocks, and especially dividend stocks go down. Ideally what to look for in a dividend stock is a company that will thrive when rates go up, such as a bank. Or, simply wait until rates go up and purchase the dividend stock when it is cheap.
A Long Term Investment
Dividend stocks belong in your portfolio for the long term. So, what to look for in a dividend stock is a company that has been paying dividends for decades or even a century. The point is to receive and roll over dividends year by year for decades and let the exponential increase in your holdings make you rich. Oil dividend stocks are considered by many to be ideal for such a strategy. Read what Motley Fool has to say again.
Kinder Morgan (NYSE: KMI ) is one of my favorite high-yield dividend growth stocks and a major reason for this is because of how well it’s been able to handle the oil crash. Let’s look at five key facts from Kinder’s recent conference call that show why the company is likely to thrive even in a world of lower energy prices. “Our average realized oil price per barrel in our CO2 segment was $72.62 in the first quarter of ’15, versus $91.89 in the same quarter a year ago. And the average Henry Hub price for natural gas was $2.98 in the first quarter of ’15 versus $4.94 in the first quarter of ‘14.”Richard Kinder, founder, chairman, and CEO.
Picking long dividend stocks is like picking any long term investment. You want to see proof that the company’s business plan works now and will continue to work for a long, long time.