Posted on | March 25, 2013 | Comments Off
When you buy a stock in a company, you become a partial owner of its assets and profits. There are certain caveats to being a partial owner through a stock, but in general a stockholder is entitled to a share in the profits of a company. Dividends are one way in which a company management or board of directors can share the profits with the stockholders of a company.
Regular Dividends are Rare
Even though dividends are the easiest way in which a company may share its profits with its stockholders, companies rarely give out dividend. This is true even for companies that have a profit to share. A number of factors combine to make dividends rare and regular dividends even rarer. Some companies need all the money they have to grow, so they avoid paying dividend and reinvest the money in their own schemes. Others do not have any profit to share, so they do not declare any dividends.
The companies that pay regular dividends tend to be ones that have reached a stage of plateau as far as their growth is concerned. Such companies usually have a stable market share and business model, and do not require money to invest in new schemes.
The Attraction of Perpetual Dividend Raisers
The rarity of regular dividend paying companies makes them an attractive option for you if you want a stable dividend income. However, there is a class of companies that are known to not only pay regular dividend, but also raise their dividend with time. These companies have a stable business model that can generate income at a consistent rate, and are therefore able to increase their dividend to at least match the rate of inflation.
It has been seen in the wider market that no more than 100 companies have consistently raised their dividends over the last 5 years, and the number of companies that have consistently raised their dividends for 10 years is less than 50. In a market that contains thousands of companies, perpetual dividend raisers are a rarity. Just like other rare things, perpetual dividend raisers can also prove valuable if you invest in them.
Investing in Perpetual Dividend Raisers
When you assess a company to invest in it as a perpetual dividend raiser, you should check that the company has enough profits that it can pay out regular dividend and also raise it with time. You can check the company’s capability to pay dividend by calculating its payout ratio, which refers to the ratio of the dividends paid by a company in a year to the annual profits made by the company. As long as the payout ratio is lower than 60%, you are assured that even if the company’s profits took a tumble, it could continue to pay out its dividend.
Perpetual dividend raisers are a rarity in the stock market, but once found, such stocks can definitely assure you consistent returns on your principal. These companies can raise their dividend to match, and sometimes beat, the rate of inflation, which can add up over time to give you a very handsome rate of returns.