The Most Important Thing To Consider When Selecting A Dividend Stock

In selecting a dividend growth stock, investors look at many metrics and try to determine what the future holds for the company. Among those considered are free cash flow, debt levels, current yield, dividend growth rate and fair value. Not to diminish any of these, because they are all very important, but they are not the most important thing that we need to look for. Free cash flow helps define the viability of the business to generate sufficient cash to meet the operating expenses and replacement capital. A high debt level can be a drain on free cash flow, sometimes to the point the company can no longer afford to pay a dividend. Current yield defines the money we will earn today. If it is too low we may not be able to cover our living expenses. Inflation is inevitable, especially when the money supply is expanded. A robust dividend growth rate in excess of inflation will ensure we never lose purchasing power. When selecting a dividend growth stock there is really only one factor that is important - sustainability. As dividend growth investors we are looking for stocks that will continue to raise their dividends into the future. Below are three things I consider when assessing the sustainability of a dividend growth stock: Years Of Consecutive Dividend Increases Inertia is powerful force. Once a company has established a track record of growing its dividend over the decades and developed a shareholder base that expects higher dividends each year, it becomes increasing difficult for management to cut or fail to raise their dividend. No CEO of this type of company wants a dividend cut to occur on his or her watch. There are precious few Dividend Aristocrats remaining and those left enjoy their elite status. Strong Financial Condition Dividends are paid with cash, not earnings. Ultimately, investors must focus on the ability of a company to generate cash. In addition to the metrics mentioned above, I also look for: Declining Shares Outstanding: I am leery of a company that consistently grows its shares outstanding in the absence of major acquisitions. Growing Equity: If shares outstanding aren't increasing, and equity is rising then the business is more likely to generate sufficient earnings to cover dividends and share repurchases. Business Outlook With the abundance of information available on the internet, the ability to judge past performance is quite simple. One of the most difficult challenges an investor faces is to determine are the future prospects of a company. Certain questions have to be answered.123... Read more