Dividends Offer Insight as Well as Income
Many investors are fans of dividends because of the income stream they provide. Whether you choose to live off of those dividend payments or reinvest them to help grow your wealth and investing capital, monthly, quarterly or annual dividend payments are an added bonus for investors, but there are other reasons to be bullish when it comes to dividends. For example, the ability of a management team to consistently pay a quarterly dividend points to favorable cash flow generation. Even better is what I discussed with you last week — dividend dynamo companies that have such strong business models that they can consistently raise their annual dividend. A great example of that is McCormick & Co. (MKC), which just raised its annual dividend for the 28th time.
There is another positive to dividends and dividend dynamo companies in particular. Before I get to that, I think you’ll agree that one of the hardest things in investing is how to assess what a stock you are eyeing is really worth. There are all sorts of valuation techniques and methodologies you can employ to determine that security’s value. Believe me, after working with institutional investors for a number of years I’m quite familiar with them: the price to earnings (P/E) ratio, the P/E to growth ratio, price to sales and enterprise value to earnings before interest, tax, depreciation and amortization (EBITDA). If what you are analyzing has a net cash balance sheet, you have to account for that in your calculations.
Another valuation tool you can use is dividends. More specifically, you can examine the company’s dividend yield against the highs and lows in its stock price. For those companies that I recommend to subscribers of PowerTrend Profits and for positions I am evaluating for the Thematic Growth Portfolio that I oversee for Fabian Wealth Strategies, this is a mandatory exercise. By identifying prior peaks and troughs in a stock’s share price going back several years and the corresponding dividend yield, we can build an historical framework of peak and trough dividend yields for the shares.
Read more about using dividends to gauge the strength of a stock at Eagle Daily Investor.