If you stick to dividend-paying stocks, you’ll avoid most of the market’s greatest disasters. That’s because a history of dividends says a good deal about a company’s long-term soundness and stability.
Investors generally look to more conservative stocks, like banks and utilities, for income, and to more aggressive stocks for capital gains. Yet there are a number of aggressive stocks that also pay a regular dividend. Some even have dividend yields that are as high—or even higher—than yields on more established companies.
(An aggressive dividend-paying stock that we analyze in our Stock Pickers Digest newsletter had a strong surge last year. I’ll give you the details a little further on.)
Don’t judge a company solely by its dividend
As with conservative dividend-paying stocks, aggressive dividend stocks also 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 on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).
That’s because high yield can sometimes be a danger sign rather than a bargain. We talked about how to judge dividend yield in some detail last week. (View the article here.) For example, a stock’s yield could be high simply because its share price has dropped sharply (since you use a company’s share price to calculate yield). That drop may signal coming bad news.
As well, you should always remember that while aggressive stocks hold the potential for greater gains than conservative selections, they expose you to a higher level of risk — even if they do pay dividends.
That’s why we recommend that you look beyond dividend yield when making investment decisions, and look for dividend stocks that have established a sustainable business and have at least some history of building revenue and cash flow.
Next we have a prime example of a fast-growing dividend stock that meets those criteria.
The Growing Power of Dividends
Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor.
The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.
Stock surges more than 40% while raising its dividend again
Carfinco Financial Group (Toronto symbol CFN; www.carfinco.com) provides car loans to consumers who aren’t able to meet the criteria of traditional lenders, like banks.
Edmonton-based Carfinco started out by financing vehicle repairs in 1997. In January 2001, the company got out of the repair-financing business to focus solely on lending money to car buyers. Carfinco aims to review a customer’s credit and provide an approval or a rejection within 30 minutes with its online application system. The company evaluates over 6,500 credit applications a month.
The company’s well-established dealer network, its investments in Internet loan-approval technology and its experience in the higher-risk lending market should let it keep increasing its market share.
Since we first recommended Carfinco in the July 2012 issue of Stock Pickers Digest, the shares have gained 41% for our readers. What’s more, Carfinco has raised its dividend in each of the past two years. At its monthly rate of $0.040, the stock currently yields 4.3%.
We plan an update soon on our advice on Carfinco in Stock Pickers Digest. We’ll look at its current prospects and whether its shares can continue their rise.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
When you buy a dividend stock, do you insist on a fairly long history of dividends as a sign of relative safety? Or do you take the initiation of a dividend as a key safety marker when you’re looking for aggressive stock investments? Let us know what you think.