Top-quality high growth dividend stocks can give investors the best of both investment worlds—capital gains and income
Investors generally look to aggressive stocks for capital gains and to more conservative stocks for income. However, there are some high growth dividend stocks that offer yields that are as high—or even higher—than yields on more established companies.
Still, you need to focus more than ever on quality when it comes to finding the best high growth dividend stocks.
The accelerating power of dividends
Dividends can turn an average portfolio into a strong, fast-growing one. Over the years, Pat McKeough has shown how to use high quality dividend stocks to add tremendous earning power. Now, Pat shows you how to make it work for you in his complete guide to dividend investing. It’s ready to download and read now.
As with conservative dividend-paying stocks, high growth dividend stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.
However, it’s important to avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).
That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could be high simply because its share price has dropped sharply in anticipation of a dividend cut.
As well, you should always remember that while aggressive stocks may hold the potential for greater gains than conservative selections, they expose you to a higher level of risk—whether or not they are currently paying dividends.
That’s why we recommend that you look beyond dividend yield when making investments in high growth dividend stocks, and look for dividend stocks that have also established a business and have at least some history of building revenue and cash flow.
What are dividends?
Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well. Dividends can produce as much as a third of your total return over long periods.
Here are 6 tips for investing in high growth dividend stocks
Dividends can grow. Stock prices rise and fall. Interest on bonds or GICs holds steady, at best. But the best dividend stocks like to ratchet their dividends upward over time—holding them steady in a bad year, and raising them in a good one. That also gives you a hedge against inflation.
Dividends are a sign of investment quality. Some high growth companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
Watch out for unusually high dividend yields. Investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a high growth dividend stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. That’s why we recommend that you look beyond dividend yield when making investment decisions, and look for companies that also have established a sound business and have a history of building revenue and cash flow.
A history of paying a dividend. One of the best ways of picking a quality high growth dividend stocks is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.
The best high growth dividend stocks can feature hidden assets. When researching the best dividend stocks, also take a close look at the balance sheet. Can you spot any hidden assets? For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
The best high growth dividend stocks dominate their markets. We look for Canadian dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.
Some high growth dividend stocks give their shareholders the opportunity to participate in its new dividend reinvestment plan (DRIP). This lets investors use their dividends to buy new shares, sometimes at a 5% discount to the market price.
DRIPs bypass brokers, so you save on commissions. DRIPs also eliminate the nuisance effect of receiving small cash dividend payments. Generally, investors must first own and register at least one share before they can participate in a DRIP. Registration will generally cost $40 to $50 per company. The investor must then notify the company that they wish to participate in its DRIP.
You can register for dividend reinvestment plans at no cost through most discount brokers (these are called “synthetic DRIPs”). However, the broker may or may not pass along any reinvestment discount to you. As well, you can only buy whole shares through these DRIPs, so dividends paid must be greater than the share price. For example, say you receive a $35 dividend, and the stock is trading at $30. Assuming the company does not offer a reinvestment discount, you would receive one share and $5 in cash.
DRIPs help high growth dividend stocks attract more investors. They also let them conserve funds by issuing shares instead of paying out cash, which all growth companies like to do.
Are you invested in any high growth dividend stocks? Have they been profitable for you? Share your experience with us in the comments.
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