Dividend investing should be a part of anyone’s diversified portfolio. But if you’re looking for new opportunities, which are the better dividend stocks to consider: those that grow their dividend by large amounts every couple of years or those that grow them at a lower rate but consistently?
Today, let’s look at what makes a great dividend stock, and what investors should be looking for.
Profitability over revenue
When looking into dividend stocks, perhaps the biggest influence will be on whether a company is profitable or not. And that’s not just hitting profitability now and again, but long-term profitability. Consistent annual growth should create consistent dividend payments and increases as well.
If you want a more specific range, look for companies that offer earnings growth expectations between 5% and 15% over the long term. Any lower, and earnings may not produce enough to cover dividends. But any higher, and the company could set itself up for earnings disappointments.
Earnings will also support cash flow, so make sure the company has enough cash on hand to support the dividend as well — not just cash but also little to no debt. Those companies with higher debt will likely need to divert funds to cover it, meaning not just lower dividend payments, but even cuts.
Think broadly
Now that you’ve found a company or two that tick all these boxes, it’s also important to consider the sector as a whole. For instance, energy stocks have long been touted as some of the best dividend stocks. That’s because they’re held up by long-term contracts that produce profitability.
However, this has been changing, with the drop in oil prices recently causing stock prices to dive across the board. That also meant there was less cash for dividend payments. This could mean that investors might want to consider renewable energy in the future for stable payments instead.
In fact, many energy stocks have proven that consistency may not be as good as growth. Energy stocks are increasing their dividends consistently repeatedly, but creating more and more debt during this time. So, instead of using the cash on hand properly, these companies blindly stick to their Dividend Aristocrat status. So, consider another method.
Strong annual growth
Look at companies that provide strong compound annual growth rates (CAGRs) for investment opportunities — ones that have surged year after year based on performance rather than a blind commitment. And one to consider right now would be Cameco (TSX: CCO).
Cameco stock is a great option as the world shifts to renewable energy, benefiting in the last few years from rising uranium prices. Cameco stock currently has a dividend yield of just 0.19%. However, during the last five years, the company has increased its dividend at a CAGR of 8.5%. That’s strong growth that battles even some of the bigger energy companies, but it isn’t each and every year.
That’s because the company continues to put its cash to good use, making smart business decisions through mergers, acquisitions, and other growth opportunities. So, while other dividend stocks haven’t grown in share price, look to Cameco stock for growth of 300% in the last five years!
So, don’t blindly pick consistency over growth. Instead, consider each option and look to the broader market to pick the best dividend stock for your portfolio.
