Unlike bonds, Australian dividend stocks investment has a long track record of success and may safeguard your money from inflation. Nonetheless, it may be difficult to identify superior dividend payers. This article summarises the most important characteristics of Australian dividend stocks that investors should seek. If you are just starting out in the stock market, you might benefit from these suggestions for selecting high-quality Australian dividend stocks.
Invest in Companies With a Mid to Large-Sized Market Capitalization
Popular Australian dividend stocks often belong to established businesses with reliable earnings and cash flow. These enterprises often do not see rapid expansion.
Indeed, rapid growth devours cash flow for expansion, leaving little for dividends. Larger, more established businesses often aren’t developing rapidly, so they have more money to pay out to their shareholders in the form of dividends.
However, smaller, high-growth Australian dividend stocks have a harder time finding the capital they need to develop, so they have less money available to distribute as dividends to their investors.
Greater Than 50% of Earnings Are Distributed As Dividends
How much of a business’s profit is distributed to shareholders in the form of dividend payments is measured by the dividend payout ratio. How long a firm has been consistently paying Australian dividend stocks is a good indicator of its potential to continue doing so in the future.
It is appropriate for a big, stable firm that is no longer focused on rapid expansion to distribute the vast majority of its income to its owners.
The optimal payout ratio has not been established as a universal standard. Those looking to cash in on dividends would like a payout ratio in the upper 40s to low 50s. You don’t want the payout ratio to be too high (over, say, 80%) and leave the firm open to slashing dividends in the case of a drop in profits.
It’s important to investigate the reasons behind a company’s low payout ratio. Unless there is a compelling reason not to or a mechanism to provide extraordinary returns for shareholders, the bulk of earnings should be distributed to them in the form of dividends. Perhaps a payout ratio of (about) 50-70% is optimal.
Proven Track Record of Dividend Payments
The corporation must have a history of reliably and steadily increasing dividend payments to its shareholders.
A huge, prosperous business that has earnings to share will provide little pleasure to dividend investors if it decides to pay those profits out at erratic intervals.
You should verify that the dividend payment has increased annually over the last five to ten years. This demonstrates that management is prepared to reward shareholders with a portion of the firm’s increasing profits as the company expands.
The Core of the Business Is Solid
However, many dividend investors pay little attention to the bigger picture of Australian dividend stocks. They have made the decision to concentrate mostly on dividend yield.
Sometimes, this might be too narrow. An investor’s primary concern should be the dividend yield, but the state of the firm as a whole should also be taken into account.
Australian dividend stocks are unsustainable for a corporation whose underlying financial health is worsening (declining sales, earnings, cash flow, narrowing economic moat, etc.). The company’s ability to pay dividends is directly proportional to its income and profits.
When investors discover that Australian dividend stocks are no longer performing, they will sell their shares, causing the price to decrease. Any dividend profits you may have made up to this point will be completely erased by this price drop.
If you wish to invest in Australian dividend stocks, you need to be sure the firm will be healthy for the long term.