(David Brickell) For investors that want regular returns from their investments, a well researched dividend stock strategy could be an ideal solution. Yet, in a market where headlines are dominated by glamorous growth stock stories – with plenty of upside but no immediate income – knowing how and where to look for the best and most reliable yielding shares presents its own set of challenges.
Buying stocks that pay regular dividends is an investment approach that's as old as the market – but current low interest rates and depressed bond yields are making it an increasingly attractive prospect for some. In tandem, dividend payouts from UK listed corporates continues to grow. In the first quarter of 2012 companies increasing payouts outnumbered those cutting by 3.8:1 – but that was down slightly on the 4.1:1 for 2011 overall.
That said, individual investors are frequently divided on whether the most profitable returns are achieved from dividend stocks or capital growth. Indeed, with average stock holding periods among private stock pickers estimated to be around eight months, it is clear that, at least in part, many investing strategies are more concerned with value gain than long term dividend returns. In a sense this appears counterintuitive to some market stats. Two years ago, James Montier at US investment firm GMO, wrote a paper insisting that: "…to those with an attention span measured in longer than milliseconds – who are few and far between, to judge from today's markets – dividends are a vital element of return." He claimed that, looking at the US market since 1871, on a one-year time horizon, nearly 80 percent of the return has been generated by fluctuations in valuation. However, over five years, dividend yield and dividend growth account for almost 80 percent of the return.
For dividend virgins, here are some of the basic metrics (and their potential pitfalls) that are required when weighing the investment case for a yielding stock.
1. Dividend Yield
In simple terms, the dividend yield measures how much a company has paid out in dividends over the past year relative to its share price (historic annual dividend per share divided by the current share price as a percentage). A forecast yield can also be established by using consensus estimates from analysts.
High yields are obviously a head-turner for dividend hunters and they tend to be dominated by some of the largest and most prestigious companies in the market – the top three are currently Man Group, Resolution and Aviva.