How can you estimate future dividends? One of the key reasons people buy stocks is for dividends but it is good to have an idea of how reliable a company will be in paying one and an indicative idea of what can be expected.
In this article, we look over 3 useful ways.
What are the Best ASX Stocks to invest in right now?
Check our buy/sell tips on the top Stocks in ASX
How to estimate future dividends
1. Consider a company’s past history of paying dividends
One important factor is the company’s past dividend history. If the company has been consistently paying out dividends over time, it may be indicative of their commitment to continuing the practice in the future.
Amongst Australian shares, the big mining stocks and the big banks are consistent dividend payers.
Looking to US shares, many companies are. But there’s a group of companies called Dividend Aristocrats that have increased dividends for over 25 straight years. And a handful have done it for over 60!
Well, not yet. But there are 3 companies that are 75% of the way to 84 years and a handful of others nipping at the heels of that 75% milestone. We wrote about this list of companies a few days ago and noted our favourite stocks.
2. Looking at a company’s financial position
Secondly, analysing the company’s financial statements and cash flow can give investors insight into how much money is available to pay out in dividends and whether or not management is willing to share profits with shareholders.
The cash flow statement is particularly important because it cannot lie like the income statement can.
It is also important to consider the industry that the company operates in and its competitive landscape as this can help investors determine if there are conditions which could support dividend payments in the future.
Lastly under this point, keeping up with news surrounding the business and changes in macroeconomic conditions can provide investors with additional information that can influence decisions on investing for dividend income.
3. Consider a company’s dividend policy
Many companies will have a policy to pay out a certain percentage of its profit as dividends.
This makes your job as an investor a lot easier! Well, that is assuming you know what a profit will be. This is easier when a company provides guidance or when several analysts cover the stock and make their own forecasts.
Although of course, companies can (and do) miss them. And there can be hell to pay, especially when it was unexpected or if it is the company’s first reporting season as a publicly listed company.
But don’t forget about growth
All this being said, investors should not fail to neglect a stock’s growth prospects over income prospects.
After all, there’s a case to be made that the former can pay for the latter over time.
Many companies with a track record of paying dividends wouldn’t’ve been able to do so had they not grown at all, or perhaps just at GDP. And when companies enter tough times, they may have to suspend dividends altogether.
But ultimately, the ability to consistently pay and grow dividends over time may be a useful indication that a stock is a growth opportunity as well as being an income opportunity!
Stocks Down Under Concierge is here to help you pick winning stocks!
The team at Stocks Down Under have been in the markets since the mid-90s and we have gone through many ups and downs. We have written about every sector!
Our Concierge BUY and SELL service picks the best stocks on ASX. We won’t just tell you what to buy – we give you a buy range, price target and stop loss level in order to maximise total returns. And we will only recommend very high conviction stocks where substantial due diligence has been conducted.
Our performance is well ahead of the ASX200 and All Ords.
You can try out Concierge for 14 days … for FREE.
There’s no credit card needed – the trial expires automatically.
WAM Capital (ASX:WAM) is one of several Listed Investment Companies (LICs) operated by Wilson Asset Management. Wilson Asset Management is…
Reliance Worldwide (ASX:RWC) is one of the best companies to hold amidst record-high inflation, in our view. As a plumbing supplies…