The Power of Dividend Growth In Equity Investment

Before now many investors had always thought of dividend-paying stocks as boring, offering a low return on investment when compared to high flying penny stocks, whose volatility can be pretty exciting, while those who know how to successfully ride on them make a kill.
However, dividend-paying companies are usually more matured and predictable, a situation that some may consider dull. However, the combination of a consistent dividend and a rising stock price can offer earnings that are potentially powerful enough to be excited about.
Things to know with regards to dividend growth would include a high dividend yield; just as understanding how to estimate dividend-paying companies can give some insights into how payout can boost returns on investment, especially if such income is reinvested.
A common perception is that a high dividend yield indicates that the dividend paid is a fairly high proportion of the return on the stock price and the most important measure.
However, a yield that is considerably higher than that of other stocks in an industry may indicate that it is not a good dividend, but one depressed and equal to annual dividends per share divided by share price.
The price decline, in turn, may result in a dividend cut, or worse still, no payout at all. The important indication of dividend power is not much about a high Dividend Yield, but the quality of a company’s numbers and growth that is discernible through its payment history. Expectations are that a company’s dividend payment should grow over time, based on the improvements in its earnings. If you are a long term investor, looking out for such companies can be very rewarding.
Dividend payout ratio: This is the proportion of a company’s earnings allocated to paying dividends, which further demonstrates that the source of dividends- the company’s net profit aligns with its growth.
Therefore, if a company keeps dividend payout ratio constant at, say 5%, and the company revenue and profit continue to grow, that 5% begins to represent a larger amount in absolute terms. For instance, 5% of N30 earnings per share, or N1.50, is higher than 5% of N15 earnings power which is 75 kobo.
We can demonstrate this with an example. Let’s say you invested a total of N1,000 in AXY Company, buying 10 shares each at N100 per unit, and it is a well-managed business with a price-to-earnings ratio of 10, and dividend payout of 10%. It translates to a dividend of N1.00 per share, which is decent, even as it is nothing to celebrate, as it represents a miserly 1% of your investment as a dividend.
However, because AXY Company is well managed, the company expands steadily and after some years the share price grew to N200 each. Even if the payout ratio remains constant at 10% over the period, just as the price-to-earnings ratio, dividend per share grows to 10% of N20 or N2 each, as a result of the increased earnings, even while payout remains unchanged. Since you purchased the shares at N100 per share, your effective Dividend Yield is now 2%, as against the initial 1%.
For years, many investors have been using this dividend-focused strategy by buying shares of blue-chips companies. In the above example, we showed how lucrative a static dividend payout can be; imagine the earning power of the company grows so much as to increase its payout.
In all of these scenarios, a company’s dividend policy plays an important role, because the portion of its earnings that are paid to shareholders is pre-determined and also guides the dividend equalization, where a company wants to maintain a steady payout, whether in bad or good times. During lean times, it is usual for company boards to go into their reserves or retained earnings to make up for shortfalls, so as to reward shareholders.
The company’s reserves serve as a buffer between a certain dividend level and profit. The excess funds are transferred and stored in a reserve account in good years, to be withdrawn in bad years for the company to sustain its dividend payout standard. Another reason why companies maintain reserves or retained earnings is such that the management can be utilized such for expansion or to fund operations, rather than resorting to bank borrowing.
As the New Year kicks off with an uptrend market, smart traders and discerning investors should prepare for the earnings season, and the associated tendency of dividend-paying stocks to perform above average in the first quarter of the year. To profit from the potential gains of the earnings reporting season therefore, you as an investor or trader should consider positioning in value stocks with a strong possibility of payout growth, irrespective of the current prices.

What to know when investing in stock market
It is true that for successful investment while growing your wealth in any market, an investor must understand the bigger picture of the economy and stock market dynamics. Today’s wealthy men who made fortunes from equity investments are those that recognize the long-term nature of the stock market and know the appropriate keys with which to play the game profitably. The big picture gives an idea as to how all the facets of the economy work together to influence share prices of quoted companies.
A booming economy will have a strong and promising stock market which is the leading indicator that reveals the country’s economic prosperity.
An economy consists of the socio-political and economic environments that influence business activities and in turn, drive a nation’s growth and development.
Every economy is sub-divided into the market, sectors, industries and then companies. It also has economic cycles that go from boom to gloom. The boom stages are the early, middle and late expansion periods; while the gloomy stages can come in the form of early and late periods of contraction.
To be a successful investor, one must identify the stage an economy is, and which sector, industry, and the company can do well in any of these stages by remaining in business and posting good earnings capable of supporting future dividend payout.
One, therefore, has to look at the nature of a particular company’s products and services and try to determine whether demand for them is inelastic in nature such that a price increase will not have much effect on the demand for them. One question that would arise is whether the company has a clear and simple business model that is easily understood? And also, whether it is has a good management team, as well as a succession plan in place?
Other factors for identifying quality companies are consistent earnings growth, a profit margin that is above 10%, low debt, improved cash flow, and a good dividend payout ratio. This suggests that planning one’s financial freedom through equity investment is very possible if you buy the right stocks as you plan for your retirement.
The 10 Golden stocks selected at our Invest 2020 Traders and Investors Summit have, so far, shown strength in their earnings power on a quarterly/yearly basis, recording consistent growth in dividend payout. Also, the nature of their products or services and business models support future performance.
In picking any stock into your portfolio, ensure it shows qualities that are consistent with the factors mentioned above. Also, select profitable and defensive stocks that meet your investment goals, because your objective helps you to plan your trading, and or investment.
For your retirement stocks pick, trading and investing for the long-term, sign up for Investdata buy and sell signal setup by calling 08028164085

When to buy and when to sell using Technical Analysis
To make real money in the stock market you don’t need to know why a stock price rises or falls, you just need to know two things: When to buy and when to sell. If you can quantitatively measure the buying and selling pressure of stock, then you will know in advance whether the price of a stock is likely to go up or down. And you will then know if you should take a ‘buy,’ or ‘sell’ position.
In other words, if you take a reading of the buying and selling pressure for a stock, you can successfully assess whether the price is likely to go up or down. There are numerous ways to measure the buying and selling pressure of a stock.
We want to teach you several methods. That way you can use all of them, or just work with the methods most comfortable for you. Remember, comfort and ease are what Investdata aims for and which our Buy and Sell Signal Setup offer subscribers
The best way to measure buying and selling pressure is to track the daily price movement of a stock. If the movement is increasing, then the buying is exceeding selling pressure and the stock is signaling ‘BUY’. On the contrary, should the daily price be on the decline, then the selling is exceeding buying pressure and the stock is said to be displaying a ‘SELL’ signal.

Ambrose Omordion
CRO|Investdata Consulting Ltd
Tel: 08028164085, 08032055467