Hi, it's Kent again – filling in for Justice for another day. Let's slightly shift gears today. Yesterday I gave examples of how to take a "sector-based" approach to finding stocks.
Today I want to talk about dividends.

The Safe Haven Investor Focus

When you think about protecting and growing your wealth over the long term, one of the first things that comes to mind, or should come to mind, is dividends.

I believe dividends and dividend-paying stocks should be a core foundation of any diversified long-term investment portfolio... especially one focusing on safely building wealth and retirement assets.

My goal for Safe Haven Investor readers (and with Taipan Daily too) is to provide ideas and insights for long-term wealth creation (i.e. for your retirement), with a conservative or safer approach – that is, a priority of minimizing downside risk.

(To be honest, when Justice first asked me about taking over Safe Haven Investor, I immediately was attracted to the newsletter's title. It fit my nature and my training perfectly.)

A Dividend Refresher Course

First, as a refresher, you probably know that dividends are a means of paying shareholders excess cash. Dividends are not a requirement and can be cut at any time (as we witnessed in record amounts this past year). For this reason, a company's dividend policy sends important messages (i.e. signals) to the investment community. Starting, raising or cutting dividends are a very important part of corporate finance strategy.

For companies that are growing rapidly (like technology companies, for example), excess cash is used to fund projects, acquisitions, or research & development that will grow earnings. So, they don't really have dividends.

In companies that have slower growth prospects, like utilities and tobacco companies, the company distributes a large portion of its excess cash to shareholders by way of the dividend.

And then there is everyone else in between – companies that pay a modest dividend amount, but still have opportunities to deploy cash to grow earnings. (There is a much deeper qualitative, quantitative and analytical foundation for dividend policy and theory that is quite fascinating, to me at least, but that discussion is for another day.)

It's also good to think about the "payout ratio." The payout ratio is an important metric to look at when analyzing dividend-paying stocks. It is a key measure of dividend sustainability.

The payout ratio is simply the dividend amount paid in dollars divided by the total earnings. If it gets too high, then watch out! Typical dividend-paying companies keep the payout ratio between 25% and 45%.