Investing in a range of dividend stocks can form a reliable income stream and build wealth. Following tried and tested dividend investing advice, will boost your dividend payout amount and dividend growth in the long-term.
Sustainability
The dividend yield is the first thing most dividend investors look for when selecting stocks for income, but you also have to think about whether the dividend payout is sustainable.
Selecting an investment that offers more stability can mean sacrificing a certain amount of yield in the short-term, but can mean the result may be more favorable over a longer time period.
Some people will look at a stock that has a high dividend yield because the share price has fallen, but if the company is not in good health and the dividend is not sustainable, you would have fallen into a dividend trap.
Established dividend companies
These are companies that have paid out and increased dividends for a long period of time. Looking back at past performance and management's handling of dividend payouts, is a good indication of what will happen in the future, but not fool-proof.
On the S&P they have what is known as 'dividend aristocrats', which are companies that have increased their dividend for 25 years or more.
In Australia, the closet to dividend aristocrats are stocks like Ramsay Health Care Limited (ASX: RHC), which has increased its dividends since 1998.
Growth companies
In saying that it is also beneficial to look at smaller growth companies, as the potential for dividend growth can be high and over the long term bring in a large amount of income.
You will need to do your research with this approach and make sure management are competent in handling dividend payouts.
The best management will raise the dividend with great caution and when it is probable that it can be maintained. Only in the gravest situation should it be lowered. This way the stock will gain and maintain a permanent shareholder following.
If the company fails to deliver on the growth you should think about whether you want to hang on or cut your losses.
On the ASX, Greencross Limited (ASX: GXL) is an example of a growth stock, that has seen a steady increase in dividends since 2008.
Be wary of the dividend payout ratio
The dividend payout ratio is the percentage of earnings paid to shareholders in dividends. This shows you how much the company is paying you in dividends from their earnings and how much they are putting back into the company to invest in growth, pay off debt, etc.
You may have a high-yield dividend stock, but if the company is paying out a large percentage of its income to investors, that's a sign that you need to be careful, because if the company were to see its income stream reduced, the dividends you're receiving would be most likely be reduced. You just need to ask Telstra Corporation Ltd (ASX: TLS) shareholders about this wealth-hurting scenario.
If you follow theses tips and do your research when buying stocks for dividends, you will be well placed to build long term wealth.
