Before now many investors think of dividend paying stocks as boring, low return on investment opportunities, compared to high flying penny stocks, whose volatility can be pretty exciting.
Dividend paying companies are usually more mature and predicable.
Though this may be dull for some, the combination of a consistent dividend with a rising stock price can offer earnings that are potentially powerful enough to be excited about.
Things to know with regards to dividend growth would include the following:
High dividend yield- understanding how to estimate dividend paying companies can give us some insights into how dividends can boost your returns on investment, especially if reinvested.
A common perception is that a high dividend yield, indicates that the dividend paid is a fairly high proportion of return on the stock price and the most important measure.
However, yield that is considerably higher than that of other stocks in an industry may indicate not a good dividend but rather a depressed price dividend yield is equal to annual dividends per share divided by share price. The suffering price, in turn, may signal a dividend cut or worse still the elimination of dividend. The important indication of dividend power is not much a high dividend yield but high company quality and growth which you can discover through its history of dividend payment, which should increase over time. If you are a long term investor, looking out for such companies can be very rewarding.
Dividend payout ratio- The dividend payout ratio, the proportion of the company’s earnings allocated to paying dividends, further demonstrates that the source of dividend profitability works in combination with a company’s growth.
Therefore, if a company keeps a dividend payout ratio constant, say 5% and the company grows, that 5% begins to represent a larger and larger amount. For instance, 5% of N30, which is N1.50 is higher than 5% of N15 which is 75 kobo.
We can demonstrate this with an example. Let’s say you invested N1,000, in AXY Company by buying 10 shares, each at N100 per share. It is a well-managed company that has a price to earnings ratio of 10, and dividend payout of 10%, which amounts to a dividend of N1.00 per share. That is decent, but nothing to write home about, since you receive only a miserly 1% of your investment as dividend.
However, because AXY Company is well managed, the company expands steadily and after several years, the share price grew to N200. The payout ratio, however, has remained constant at 10% and so has the price to earnings ratio at 10%, therefore you are now receiving 10% of N20 in earnings or N2 per share. As earnings increase, so does the dividend payment, even though the payout remains unchanged. Since you paid N100 per share, your effective dividend yield is now 2% from the initial 1%.
For years, many investors have been using this dividend focused strategy by buying shares of blue chips companies. In the above example, we showed how lucrative a static dividend payout can be, imagine the earning power of the company that grows so much as to increase its payout.
In all this, a company’s dividend policy plays an important role because the portion of its earnings that is paid to shareholders is determined by the policy. This also guides when it wants to apply dividend equalization, where a company wants to maintain a steady payout, whether in bad or good time. This can be achieved by the board going back to its reserves or retained earnings to make up for its shareholders.
The company’s reserves serves as buffer between a certain dividend level and profits available. The sums are transferred to reserve account in good years and withdraw therefrom in bad years to maintain the dividend payout history. The same retained earnings can equally be used by the company for expansion purposes without borrowing.
As the year winds down, smart traders and discerning investors should be preparing for the January effect, which is the tendency of small-cap stocks to perform above average in the first month of the year. To profit from the potential gains of the January effect therefore, you should consider buying low priced stocks with exposure to this segment in December.
In this period of the year, a number of short-term trades also boost activities in the market, the Santa Claus rally is one of the seasonal patterns that take place in the week between Christmas and New Year’s day. Stocks are expected to rally during this period, buying and holding for the last five trading days of the year and the first five trading days of the new year has been a winner 56% of the time, with average record 12 to 16% gain for the 10 days.
Also, at this end of the year trading strategy for investors and traders is looking at the price movement of stocks within the year or 52 weeks performance to identify the new 52-weeks lows within end of the year tend to outperform the market for the first two months of the new year.
Stocks making new lows in December could result from investors selling to celebrate, or institutional investors booking profit for the year. Buying at this period set up a potential win when investors start returning to the market after Christmas and New Year celebrations, especially as we expect to see the impact of the government’s quick fix strategies to revamp the economy again.
End of the year seasonal pattern or trading strategies can be used by investors and traders to book profits by targeting low cap stocks that have suffered price decline as a result of the general market trend but have strong fundamentals with steady profit growth prospect.
Let the best and worst performing stocks in the second half of the year guide you. See the table below.
|Best Performing Stocks|
|2nd Half to Nov 24||% Change|
|AIRLINE SERVICES AND LOGISTICS||1.82||2.67||46.70|
|MRS OIL NIGERIA||34.71||45.51||31.11|
|OKOMU OIL PALM||32.00||40.08||25.25|
|MOBIL OIL NIG.||169.00||199.02||17.76|
|LAW UNION & ROCK INSURANCE||0.50||0.58||16.00|
|LEARN AFRICA PLC||0.68||0.78||14.71|
|RED STAR EXPRESS PLC||4.30||4.45||3.49|
|Worst Performing Stocks|
|2nd Half to Nov 24||% Change|
|FORTE OIL PLC||190.34||69.00||-63.75|
|LAFARGE W A P C O||73.51||44.10||-40.01|
|CEMENT CO. OF NORTHERN NIG.||7.45||4.48||-39.87|
|ECOBANK TRANSNATIONAL INC||16.00||9.80||-38.75|
|UACN PROPERTY DEV. CO.||4.10||2.60||-36.59|
|FCMB GROUP PLC||1.60||1.05||-34.38|
|P Z CUSSONS NIGERIA||23.00||15.20||-33.91|
|AXA MANSARD INSURANCE||2.50||1.89||-24.40|
|MAY & BAKER||1.19||0.95||-20.17|
|GUINNESS NIG. PLC||109.25||89.00||-18.54|
|NPF MICROFINANCE BANK||1.21||1.02||-15.70|
|ZENITH INT’L PLC||15.77||14.00||-11.22|
|U A C N||19.99||17.76||-11.16|
|NASCON ALLIED INDUSTRIES PLC||7.96||7.19||-9.67|
|N NIG. FLOUR MILLS||6.65||6.01||-9.62|
|STANBIC IBTC HOLDINGS||16.20||15.20||-6.17|
|CUSTODIAN & ALLIED INSURANCE||4.04||3.80||-5.94|
To avoid being trapped in 2017 dividend disaster that is underway as the year winds down, the decision you make today will have a great impact on your portfolio and financial independence tomorrow. The stock market has been trending down recently, due to the unimpressive earnings reports of many companies that are listed on the exchange which was as a result of the weak economy and market.
On the strength of Q3 reports and deepened negative economic indices, prices of stocks are falling and then making the dividend yield of many companies attractive. This higher yield does not guarantee dividend payment or increase in dividend payout.
To avoid being trapped in any of the stocks, join us at the INVEST 2017 SUMMIT December 3, 2016, where the economic outlook and investment opportunities in 2017 will be reviewed; just as the safest method of investing or trading in an economy held down by recession.
The major factor that determines dividend payout by any company is its earnings, because nobody gives what he or she does not have, so it is for companies. Dividend will not be paid if ahcompany has no earnings. In the same way, it is this dividend that follow impressive numbers that drive equities price during earnings season.
This is especially true of our market, where we have many companies releasing their full year results within the first quarter of 2017 and proposing rewards for investors.
Be the first to know the 15 dividend stocks growth for 2017; 20 stocks with dividend cut in the next earnings season; and 50 equities without dividend at all in 2017.