Fixed income - A dividend stock guide
Public companies that have issued shares usually pay their shareholders a dividend that represents a distribution of the net profit of a company. The profits of a company can be retained to be reinvested into the business to further grow the share price (retained earnings) or can be distributed to the investors.
The safest or most stable dividend stocks are usually utility companies or REIT’s who offer predictable and fixed dividend returns.
A good example of a utility company is EDF with a 2.55% yield. An electricity company that is government owned and monopolizes the electricity grid and supply of France. Their yield is stable because they have both long term contracts, track record and predictable revenue.
REIT - Real Estate Investment Trust
For those of living in the UAE the Emirates REIT is the most celebrated with an approaching AUM of USD 1 billion. Based on leases, rents and assets under management the Emirates REIT issues a 4% dividend yield at USD 1.00 share price.
For low risk investors these two industries offer the safest dividend yields because of their dividend history, predictable revenue, government contracts and industry exposure as well as size.
How to pick a dividend stock?
As with any investment it’s important to to do your research when choosing a dividend stock. Dividend stock investments are a long-term investment strategy hence why you need to choose companies with a solid track record and ability to thrive despite tough economic conditions. Look at dividend history of the company. What is the reputation of the company and it’s management team? Has the company missed a dividend payout? Look for industry leaders, research the companies you’re investing in and think long-term.
Are the dividend stocks better than bonds?
A bond is an investment instrument, while a dividend refers to the income produced by stock ownership. You choose the type of risk you want to take, the type of income you prefer to earn and frequency of payments you wish to receive.
When should dividend stock be in your portfolio?
If you are building a fixed income portfolio and looking for a monthly to quarterly payout your portfolio should have bonds and dividend stock. In addition to providing a fixed dividend the share price of the stock you are purchasing also has capital growth opportunity. With the right equity to bond ratio your portfolio can have significant gains potential.
As in any investment the higher the returns the higher the risk. Do not be fooled by double digit yields, look at the share price volatility over a year and take that into account when looking to purchase. If uncertain always seek the help of a finance professional to analyze your risk exposure on a single asset.
I hope that this article helps those looking for dividend stock strategies as part of a fixed income portfolio.
You can check out the high yield dividend stocks on NASDAQ right here to get an idea of the different options available.