We have a smart post from our friends at Kapitall on investing.
When looking for a stock that provides dividend income, be sure to check a company’s free cash flow to gauge whether it can continue to fund its dividend payment.
When looking for "dividend stocks," we look for high-dividend growth and talk about things like cash flow and payout ratios.
Don’t fully understand these terms? Have no fear! Let’s take a look at what each of these metrics mean and why they are important:
Dividends are a payment made by a company to its shareholders. The money is a portion of the company’s profits. Cash dividends are paid as a percentage of the share value. That percentage is called the “dividend yield.” In our list, all stock dividends per share have been increasing with the five-year growth rate higher than the ten-year, and the three-year growth rate higher than the five-year rate.
Assets vs. Liabilities
In accounting terms, assets are anything owned by the company that generates income and is of value. This includes cash and inventory. Liabilities are the opposite–the total of all debts, loans, mortgages, etc. It is an obligation to transfer something of value away from the company. All of the stocks on our list have assets that outweigh their liabilities.
When a stock is rallying, it is performing above its market average for a given time period. It is presented as a percentage of performance relative to the average. When a stock is performing above its 20-day moving average (MA) as well as its 50- and 200- day market averages, it signals bullish momentum. All the stocks in this list are rallying above their 20, 50, and 200-day MA.
It is the amount of earnings paid out to shareholders represented as a percentage. It is calculated as the dividends per share/earnings per share. A low payout indicates a company is keeping its earnings while a high payout ratio indicated the company uses its earnings for dividend purposes. This ratio also gives an investor an idea of how well the company’s earnings can support its dividend payments (generally, the higher, the better).
Operating Cash Flow/Revenue
Free operating cash flow (FOCF) is the total operating cash flow minus all operating expenditures, such as wages, repairs and depreciation. Strong free cash flow signals a company’s ability to pay debt, dividends, and invest in their business growth. For this list all stocks have a positive operating cash flow/revenue.
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