Dividend Paying Stocks: Avoiding the Single Factor Approach


Monday, May 27, 2013/ The Analyst


Investing in company stocks that pay consistent and healthy dividends is considered a good idea by a few investors as dividends form an important component of returns on investment. Despite the fact that investors hold dividend payment in high esteem when it comes to choosing stocks to invest in, the fact remains that a high dividend paying stock today is not enough; and definitely not an absolute guarantor of consistent future payments – that will rely on the valuation of the stock.


Investors should know that it is not all stocks paying dividend today that can be invested in and they are expected to seek professional advice before doing so. Such facts that an investor must know before investing in a dividend stock are discussed below.


For starters, an investor must ascertain the potential(s) of the company they intend to invest in i.e. how the company makes its revenue and the sustainability of such revenue streams vis a vis market and business trends. Investors should be able to clarify if the earning stream is stable or not. This will reveal to the investors how risky or stable the company’s business is as an unstable company income will amount to inconsistent and unstable dividend payments.


The second issue is the competitive advantage the company enjoys which will help keep the company’s cash flow stable and as well help to grow it. If the business is able to use the competitive advantage to its own improvement then it is expected that it will benefit investors to have such cash reinvested in the business which will benefit investors in the long run.


The third issue is whether the firm is able to nurture its earnings. A firm that is not able to grow its earnings will surely not grow its dividend as growing a company’s cash flow without growing its earnings might suggests that such a firm is manipulating its cash flow.


The final question an investor must ask about a company is the risk associated with the firm itself like management’s proactive and capital allocation skills.


In our previous report titled NESTLE-and-OKOMUOIL-top-list-of-High-Dividend-payers-in-2012-Audited-Results. We stated the current position of the companies that have declared dividends so far in the 2012 Audited result.


Based on latest data, NESTLE and OKOMUOIL continue to lead the list of high dividend payers.


Out of the forty-one (41) quoted firms that have declared dividends so far, seven are from the Financial Services sector with Zenith Bank Plc declaring the highest dividend in the sector. Consumer Goods sector came second with seven (7) firms with Nestle Plc taking the lead as the highest dividend payer while Industrial Goods came third with six (6) firms as Dangote Cement Plc take the lead as the highest payer with N3.00 dividend.


Related Reports

1.NESTLE and OKOMUOIL top list of High Dividend payers in 2012 Audited Results

2.Dividend Payments in the Nigerian Capital Market - A View

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