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Live Off Dividends

Mistakes you can make during a dividend stock research ☝️

Mistakes you can make during a dividend stock research by ARTInvest
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„The bigger is better!”

I mean, I want to talk about dividend stocks… 😉

You can easily make this mistake if you want to jump into this world as quickly as you can and do not read any books or look at videos about this Subject. If you are targeting only the companies which are paying the biggest yields then you will lose money!

Most of the cases when a company starts to pay dividends over 10% then mostly they are new companies, and they have no dividend records. You don’t have to be a conservative investor like I am, this strategy will make you poor also if you are a brave investor.

This big of a yield isn’t manageable in the long run. Also many times the price chart of these companies is very volatile. Sooner or later they have to cut their dividends by a certain percentage and therefore if the stock price is also down then you will have a massive headache and don’t know what to do… Here we are for the second mistake which is about „cutting”… 🔪

📈Long dividend record?

Check. Not just long but 24 years of record(for example). Check. Decent yield. Check. What can be the next problem?

If a stock passed those checkpoints then comes next. „Did they cut their dividends in the last 5 years?” It can be easily the case that they are paying dividends but in the last 5 years(research can say „Why?”) they cut their dividends.

This isn’t a good sign. I like much more the stocks which can only increase their dividends by just 1-2% percent than the ones that cut it by a certain percentage. There is one exception - REITs (Real Estate Investment Trust).

When a REIT cuts its dividends it isn’t as bad as a normal stock. There is a rule also for them: REITs' dividends are substantial because they are required to distribute at least 90 percent of their taxable income to their shareholders annually. 🏘️

That’s why their dividends can be more volatile than others.

Let’s talk about the increase for a little…🔆

This isn’t a big deal if you don’t want to dig into this world deeper but it can be also helpful.

One rule which you have to hold in your mind every time. „Dividends aren’t mandatory payments!”. The company decides if they want to pay some and how much actually…

That’s why our best interest is to find out if they have willing to pay or not. This one is a very good metric to look at the dividend increase year by year. You can download a list from here:

This is a list of the many companies which not just pay dividends every quarter but are also increasing them every year. To be on this list, the company has to have at least 10 years of dividend-paying and increasing records. I’m using this list every day. A very useful tool and it is updated monthly.

Dividends are increasing and I receive more and more passive income. What other basic metric can go wrong?

Coverage. Yes, it is good when the company has a dividend record and the other things too but it doesn’t make any sense if your dividend will be paid from newly issued debt or newly issued shares for example.

So to take a look I have to describe this one as very good because you won't find this metric on a free platform. You have to do the calculations. The best option can be Yahoo Finance which I’m using too.

After you searched your stock, go to the „Financials” – „Cash Flow” – Click „Expand all” and here we are.

So you have two ways. One is to compare the Paid Dividends to their Free Cash Flow or compare to their Adjusted Earnings(for this one you have to go to the „Income statement”).

➗I like the first method more. There you have to divide the two numbers and you will get a percentage. For example, Cummins(CMI) has made $1.47b Free Cash Flow in 2021 and they paid out $809m of dividends. This is a 55% payout ratio which is a very good and strong number! I like to see this number under 75%.

There is much more that I will recover in the future but for this „Lesson” I think it was so far so good! 😊

There are good launch points and the first things to be considered. I hope you found this to be exciting and it is helping you to make better investment decisions.

Best regards, Adam


Hope this was useful for you! If so, hit the like button to make me feel good. Please note that the above content is not an investment advise and shall be considered only for informative purpose.

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