Some people think investing is gambling, but it’s nothing like it at all. Investing in a stock is buying a piece of a company. It’s business ownership. If the business does well, the share price can go up, or the company can pay a higher dividend.
Investing can be rewarding. Following some or all of these simple tips should help boost your overall returns.
Set reasonable goals
Some investors buy a stock without thinking about goals. How can these investors know if a particular investment was successful or not? At the very least, they should think about what kind of returns they expect from it.
Investors can get returns from capital gains and dividends. For example, Fortis Inc. (TSX:FTS)(NYSE:FTS) yields 4% and is expected to grow its dividend at a compound annual growth rate of 6% in the next few years. So, investors can expect an estimated return of 10% per year.
Don’t overpay for your shares
Valuation comes into play too. If you’ve paid too much for the Fortis shares, you should expect returns of less than 10%. In the last decade, Fortis has normally traded at a price-to-earnings ratio (P/E) of 20. In the last five years, it has traded at a normal multiple of 19.6.
At about $40.50 per share, it trades at a P/E of 18.5. So, Fortis is within its fair-value range, and investors can expect annualized returns of about 10% from an investment today.
I’ve estimated that Fortis will pay a yield of about 4% and the shares have room to appreciate 6% within a year.
Between dividends and share-price appreciation, dividends are easier to predict. Buying 100 shares today should generate $160 of annual dividends.
Investors should periodically review the estimated returns (i.e., the goals they’d set before investing) to see if their goals have been achieved. At the very least, investors should check the progress of a holding once a year.
In summary, jot down your estimates in terms of expected income and price-appreciation targets. Check back once a year to see if the estimates played out.
Buy quality businesses
What makes a quality business? Investors have different definitions of quality. Here are some attributes of quality in Fortis: the company has an S&P credit rating of A-, it has increased its dividend for more than 40 years, and it has a successful history of accretive acquisitions and integrations.
Quality businesses tend to become more profitable over time. In the case of Fortis, it simultaneously increased its profits and delivered higher dividends to its shareholders over time.
Since 2007, Fortis has increased its earnings per share and dividends per share by 6.2% and 7.4% per year, respectively. In other words, its dividends increased by 90% in that period.
Type of business
Another factor that adds to the quality of a business is whether the business is cyclical or not. Fortis is a non-cyclical business–gas and electricity are needed no matter how the economy is doing. As a result, Fortis’s earnings and share price are more stable than the average stock. Conservative investors would like businesses with low volatility.
Look for quality businesses that should become more profitable over time. If they’re fairly valued or (better yet) undervalued, estimate what returns you’ll expect from them. If you’re satisfied with the returns expectations, buy and check back periodically to see if your goals are being met.
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Fool contributor Kay Ng owns shares of FORTIS INC.