Tag Archives: NASDAQ:SBUX

Growth Or Dividends: What Should Young Investors Focus On?

It’s not as simple as just focusing on dividend or growth investing. What are the fundamentals of the business underlying a stock? It’s important not to overpay for a business. For dividend investing, there are ways to improve the safety of your dividend.

Dividend-paying multi-baggers that are priced for purchase today will be used as examples, including one Canadian Basic Materials company and one U.S. company.

I came across an article written by Financial Samurai (or Sam), who worked in the finance industry for 13 years. The article was titled: Why It’s Better To Invest In Growth Stocks Over Dividend Stocks For Younger Investors.

It takes a lot of capital to generate meaningful income

Sam starts off saying: “Even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year.”

Indeed, there are different ways to double your money. It’s a matter of if you want to focus more on income or growth.

Young people are better off focusing on growth stocks

Sam opines that:

“If you’re relatively young, say under 40 years old, investing the majority of your equity exposure in dividend yielding stocks is a suboptimal investment strategy.”

He continues that:

“Out of the few multi-bagger return stocks I’ve had over the past 16 years, none of them have been dividend stocks.”

Although none of the multi-baggers he owned were dividend stocks, there are always examples if you look for them.

Growth stocks can also pay dividends

Stella-Jones Inc. (TSX:SJ) started paying a growing dividend in 2005. Since then, the stock has appreciated 2,800% – a dividend-paying 29-bagger! Here’s the stock analysis on Stella-Jones. Read More

What is a Good Dividend Payout Ratio?

What is a good dividend payout ratio for a company? Is 70% too high? Does a company with a low ratio imply high dividend growth?

Using a concrete example, we’ll answer 3 simple questions to figure out if a company has a good dividend payout ratio that supports a healthy dividend. You can ask the same questions for any dividend company you’re interested in.

saving, investing, and compounding

Image attributed to ccPixs.com

However, a payout ratio based on earnings may not be appropriate for companies with big depreciation. Cash flows instead of earnings are better used in such cases, including for REITs and MLPs.

What is the payout ratio?

The payout ratio is the percentage of earnings that are paid out to shareholders as dividends.

For example, Fortis Inc’s  (TSX:FTS) is expected to pay out $1.525 per share of dividends in 2016. The company just hiked its Q4 dividend to $0.40 per share.

  • Fortis’s originally quarterly dividend per share was $0.375.
  • $0.375 * 3 + $0.40 * 1 = $1.525

Its earnings per share are estimated to be $2.17 in 2016. So, Fortis’s payout ratio is about 70%.

  • Annual dividend per share / Earnings per share
  • $1.525 / $2.17 = 0.7028

So, Fortis retained about 30% of its earnings to grow its business or repay its debt, etc.

A lower payout ratio implies a safer dividend than a higher ratio. Read More

5 Important Concepts About Investing

Following Ben Reynold’s popular article on 3 important dividend investing concepts with real life examples, I gave some thought about the important concepts about investing.

“Never lose money.”

This is Warren Buffett’s No. 1 rule: “Never lose money.” and his No. 2 rule is “Never forget rule No. 1.”

By buying and holding great companies which have track records of delivering results, you cannot lose money given your holding period is forever. If you are buying the best of the best companies, why would you ever sell it?

One easy way to tell that a company is great is if it has increased its dividend for many consecutive years. In Canada, the longest dividend growth streak for a publicly-traded company is more than 40 years. Fortis Inc (TSX:FTS) is one of two companies that has achieved that.

Unfortunately, Fortis is fully-valued and trades at a price-to-earnings ratio (P/E) of 20 at about CAD$43 per share. Whenever it yields close to 4%, it’ll be a decent place to buy some shares.

In the U.S., the longest dividend growth streak is more than 50 years!

Here’s a list of Canadian dividend-growth stocks and U.S. dividend-growth stocks that are updated by devoted investors who update them every month. Read More