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Dividends are king
Valued Contributor
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Dividends are king

dividends.jpg

 

What’s the single main purpose of any business? It must be profit? What’s the best way of measuring profit? That must be cash paid back to shareholders, dividends?

Now sure there are a lot of other moving parts in any business and they’re important. But my first port of call with any set of results I am looking at is the dividend, simply I want to see it moving higher.

In my ideal world results will show increased revenue with earnings (HEPS) increasing at a higher rate and dividend at a still higher rate. For example; revenue +10%, HEPS +15% and dividend +20%. That shows me a business firing on all cylinders and achieving its core function of making profits for the shareholders.

What I also look at when first investigating a stock for my portfolio is the dividend cover policy. This is the amount of profits that the company pays out as dividends. Some stocks will have a cover as low as say 1.5x, in other words a 150c HEPS will see a 100c dividend. Others may be less aggressive and have a 3x cover (paying 50c of that 150c HEPS as dividend). More mature stocks with lower growth potential will likely have a lower dividend cover, but I don’t mind so much what the dividend cover policy is. Rather I want to see what it is and how it has changed over time. As the company grows and matures we should see the dividend cover reducing slowly.

A last point or two. Cyclical stocks such as miners will have boom or bust and as such the dividend will at times disappear. This is the nature of cyclical stocks and one of the reasons why I consider them more trading them long-term buy and hold stocks. That trading period may be years and needn’t be geared, but ultimately they will see profits and dividends collapsing and I don’t want to be holding during that period.

Small cap stocks also require a different approach. They may well be making profits but they could be putting all the profits back into the company to grow the business. Here I am happy to hold small and midcap stocks but I don’t consider them long-term investments until they have proved themselves and are issuing strong and growing dividends.

 Simon

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7 Comments
New Contributor
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Community Manager

Insightful & though provoking.  

Occasional Visitor

I need advice - what is the best Div paying stocks ? [considering risk and growth]

Valued Contributor

@Blits

 

you can search for high div stocks on OST

 

On the menu ==> instruments ==> filter ==> share filter

select DY and put in a DY that you want to search above.

 

that the easy part, hard part is deicidng is that div is coming again next year as the DY is historic

Frequent Visitor

Hi Simon

Thanks for the article.

I hold CoreShares DivTrax ETF.   I like the Core Shares/ S&P Div Aristocrat approach which is based on selecting stocks with a 5 year track record of good and stable/growing dividends (not % yield).  Would you agree that this could be thought of as a momentum investing approach, based on your points above?   In light of this, I am a bit puzzled as to why the ETF has basically gone nowhere in the last year.

Any thoughts?

Wayne

New Contributor

I was told that if you manage your portfolio in a company instead of having shares in your personal name you could be shielded from dividend tax, is this true?

What would be the benefits of managing a portfolio in a pty instead of personal name besides personal CGT you would be charged?

Valued Contributor

Hi @Mokie

 

Yes, but. Thing is how do you get the money out of the company? You draw as dividends, and pay tax. Tax as income for yourself and pay tax or invoice the company, and pay tax.

 

However it is essentially an interest free loan from SARS.

eg: You have R100k invested and get R5k dividends. Tax due is R1k (20% DWT), but in a company you don't pay it until you draw the money. So if you leave if for say three years and then take it out you have had the R1k as a loan from SARS with no interest due.

 

But at the end of the day the tax will have to be paid.