Some people think investing is gambling, but it’s nothing like that at all. Investing in a stock is buying a piece of a company. It’s business ownership. If the business does well, it can lead to a higher share price and potentially a higher dividend (if the company happens to pay one).
Investing can be rewarding. In my first article today, I shared five simple tips to boost returns. Here are some more tips to help you boost your overall returns.
Buy a growing business
Buying a business that’s growing tends to be a better investment than buying one that’s not if you don’t overpay for your shares. Growth can come from a number of factors. Growing earnings can come from cost reduction leading to margin expansion or from a growing industry or from inflation.
Brookfield Infrastructure Partners L.P. (TSX: BIP.UN)(NYSE: BIP) has a diverse portfolio of global infrastructure assets, such as toll roads, rail, electricity transmission, communications infrastructure. Both developed and emerging markets are looking to invest in infrastructure. So, there’s no shortage of growth opportunities.
Manageable debt levels
To determine if a company has manageable debt levels, it’s best to compare its debt ratio with its peers’. If there’s a large difference, that can be a red flag for the one with the higher debt level.
The debt-to-cap ratio is one way to measure the financial leverage used by a company. The ratio is calculated by taking a company’s total debt and dividing it by the aggregate of its total debt and its shareholders’ equity.
Both Brookfield Infrastructure and Macquarie Infrastructure Corp., for example, have a debt-to-cap ratio of 47-49%. Other utilities also tend to have debt-to-cap ratios of roughly 50% or higher. So, Brookfield Infrastructure’s ratio doesn’t stand out as a red flag.
Buy dividend stocks
Historically, dividend-paying stocks tend to outperform companies that don’t pay a dividend. Here’s a possible explanation of why that’s the case.
Dividends are paid from a company’s earnings. So, dividend payers have less retained earnings to work with and tend to be more careful with where they invest their remaining capital.
Further, a company must remain profitable to pay safe dividends. So, buying a company that has a track record of paying dividends (or better yet, growing dividends) tends to be a safer investment.
Since 2009, Brookfield Infrastructure has increased its distribution at an annualized rate of 12.1%. Its 2016 payout is 9.4% higher than it was in 2015. The company yields nearly 4.8%, and management expects to grow it at a healthy pace of 5-9% per year.
Hold some cash
If you have an equity-intensive portfolio, it’ll help to hold some cash. The cash will help stabilize your portfolio’s volatility and help investors to hold on to their shares in a downturn. Moreover, when a quality stock is priced at a bargain, you can use the cash to scoop up some shares.
Summary
To boost your returns, look for growing businesses with manageable debt levels that pay stable, growing dividends. On top of that, have some cash on hand to be ready for buying quality stocks when they’re priced at bargains.
