Dividend Generating Investments Could Revive Sheen to Equity Investments

A company with a strong cash flow is also an early indicator of a strong business.

For some investors in the equity markets, it is a tough time. Growth is uncertain and companies are preserving capital. Regulators are now indicating to companies that any plans to pay dividend to shareholders must be put off, temporarily.

It is at times of uncertainty that dividend-paying stocks prove to be of great value. It would be important for investors to follow some or all of these indicators before identifying one or more stocks that could qualify to find a place in the portfolio.

Investors who can focus on a few fundamental principles can identify companies to suit their needs. S&P 500 Dividend Aristocrats gave a good idea of companies that have increased dividends over the last 25 years. Companies with at least 10 years of dividend-paying history on the Nasdaq, referred to as Dividend Achievers can also be narrowed down.

Companies in the U.S. generally pay dividends quarterly while some do it annually. The odd company also pays a dividend monthly.

Keeping some of these ideas in mind could help in making a final decision for your portfolio. If you follow cricket, the analogy of the markets to cricket could help too.

Long-term profitability: Companies that have a long-term profitable business are, generally, the first filter that should be used. They show consistent returns to shareholders and grow the business in scale. They may not be among the fastest-growing companies but the consistency of growth is their hallmark. A little bit like The Wall, Rahul Dravid, former captain of the Indian cricket team – he often scored runs when the chips were down for the team.

Tip: Growing business is a good choice

Consistency in performance: A company with a strong cash flow is also an early indicator of a strong business. These companies could be well integrated and critical to the business operations of other companies. Such a business generates cash that can ultimately be returned to shareholders as dividend. For example, a telecom company is critical to business operations, particularly in current times. Imagine Sachin Tendulkar – always hungry to score runs and a consistent performer throughout his 24+ years in international cricket.

Tip: Cash flow to survive downturn

Picking a new trend: The ESG sector or businesses that focus on environment, sustainability and governance are the buzzwords of today. Those companies which have scaled up their ESG businesses may find favour with investors who are focused on long-term returns. At different times, the market rewards different ideas. Remember the wrist spinners in just about every IPL team – Yuzvendra Chahal, Rashid Khan, Kuldeep Yadav, Imran Tahir, Rahul Chahar, Piyush Chawla… the list is long.

Tip: Identify a trend early

Debt’s a dirty word: Companies that have raised debt to fund growth will be laggards. Part of the cash they generate will have to be used in servicing the debt. That is not a great idea during these challenging times. Since they tend to get injured, unfortunately, you could imagine Hardik Pandya or Bhuvaneshwar Kumar. They are good but may have to be left out due to injuries.

Tip: Companies with high debt are avoidable

Choosing defensives: Established businesses in sectors like staples, healthcare, or education could be narrowed down for identifying companies that could generate dividend income. Companies that have good institutional ownership should generally be a good stock to own. A bit like picking an extra batsman on a flat pitch so that you can bat out the opponent in a cricket match.

Tip: Derisk investments in uncertain times

The best decisions for the long term are taken with a cool head. This is the time for that.