Imortant Questions About Dividend Aristocrats
Disclaimer: This post is not meant for you to take investment action on any of the stocks listed below.
No, Dividend Aristcrats are not a bunch of people who meet up for tea at the Buckingham Palace in London. Dividend Aristocrats are companies who have raised their dividend payout on stocks for more than 25 years.
You may be asking yourself, "Why is this important?"
If I told you that you could realistically live off of dividend payments from Dividend Aristocrats after 20 years of investing in them, would it spark your interest? I hope so.
First, let's talk about dividends. What are they?
Dividends are a payout of a portion of the earnings a company has made from their daily operations to shareholders.
Why do companies decided to pay shareholders dividends?
Well, there are many reasons, but the biggest reason is to make their stock more attractive. If you know for a fact that owning a company will give you dividend payments you are more likely to give that company your hard earned money over a company that does not pay them.
When people buy stock of a company, that company can use the cash from their investors to expand business operations and potentially increase revenue. For that reason, attracting more shareholders has to be a top priority for company executives and shelling out dividends is one way to do that.
If that is true, then why Are there companies that don't pay dividends?
Now you're asking the right questions. Most publicly traded companies do not pay dividends because they simply cannot afford to. You see, dividend payments come from a company's free cash or free cash flow. Free cash is the total amount of money that is left over after the company has paid off bills, employees salaries, executive bonuses and other countless kinds of expenses.
Not every company has money to pay dividends after all those expenses have been taken care of.
So companies that do pay dividends are better than companies that don't?
This is not necessarily true. Some companies feel like they need to pay dividends to keep up with the Joneses. They pay dividends at the expense of growing their company when, in all actuality, that money they are spending is stifling the company's growth opportunities.
You will find a lot of examples of companies suspending their dividend payments one quarter then selling their company the next quarter. Its possible that, if those companies never would have paid dividends, they would still be in business.
I have a robust dividend investment portfolio, but I also buy stock in good companies that do not pay them. Usually those good, non-dividend paying companies realize they can use their extra cash to grow the company. When the company grows the value of the stock grows with it.
The lesson here is that just because a company pays dividends doesn't make that company a quality investment.
Then what are characteristics of good companies that do pay dividends?
Very good question. You readers are keeping me in my toes. Valuing a stock is tedious work, but one key detail about good dividend paying stocks is that they have paid dividends for many years and increased those payments year after year. There are other cues to look at when valuing a company that require knowing the Business Language, but lets just stay focused on dividends for now.
A company that increases dividend payments informs the investor know that that company increases its free cash amount. Remember free cash from earlier in this post?
Lets take a look at Johnson and Johnson. This company pretty much has all the market share on personal and baby care products. I'd bet money that each and every one of you can find a J&J product in your home right now.
A huge company like that has way more profits than they know what to do with. So, in result, they can increase their dividend payments. They have done so for over 25 years making them a Dividend Aristocrat.
Other companies like J&J are Wal-Mart, Coca-Cola and McDonald's. You don't have to be a genius why these companies can be classified this way.
Why are Dividend Aristocrats important?
The best question of the day. Dividend Aristocrats are important because if you put enough of your own money into those companies' stock, then you could live off those dividend payments and also be sure that those companies will always pay up.
In conclusion, investing in dividend stocks is a great way to earn passive income. If you compile of list of Dividend Aristocrats and constantly scrutinize those companies to make sure that they are indeed Dividend Aristocrats, then you will ensure thatyou will have a steady stream of income hitting your bank account.
In the coming days I will detail my exact plan on dividend investing and how you can get started as soon as you get done reading. Stay tuned.