The foundations are the same. You’re investing in stocks, but your focus is on the companies that pay dividends to their shareholders time and time again.
Logically, your next step is to maximise the dividend payouts to your portfolio, and that’s where things get a little interesting…
Do your research own research on stocks
Of course, you’ve got to do your research. Any analyst will tell you that reading a single article just isn’t going to cut it. But an initial understanding is essential.
Note: This is not a stock recommendation, but a general tip on what to look for in companies that issue dividends to shareholders. For a better overview into what successful dividend investing involves, click here.
Keep in mind, previous performance isn’t always an indication of future performance. We’ve seen this to be painfully true with Telstra when it cut dividends over the last few years.
For now, let’s take a look at Whitehaven Coal Limited [ASX:WHC] — as an example of a healthy dividend-investing option.
Is Whitehaven a good dividend stock prospect?
Whitehaven Coal is the largest independent coal producer in Australia and an ASX-listed stock that can be slotted into this category. To start, WHC has a market cap of around $4 billion, and a dividend yield of 7.41%. While dividends paid to shareholders has been steadily increasing — where shareholders saw their best dividend profit on 13 September 2018, at 27 cents.
Chuck in the recent stock market boost Morrison Government election win, and there’s even more potential for the investment of dividends in a mining company like Whitehaven.
At time of writing, Whitehaven’s share price is sitting at $3.84.
Another important factor to consider is a company’s debt concentration and financial liquidity. This can give you an idea of their ability to fund growth and strategic acquisitions.
How much profit WHC collects relative to its debt is an important factor. As a general rule, you want to avoid companies that use debt to fund dividend returns. WHC’s current debt levels increased to AU$503 million from AU$246 million over the last year, accounting to long-term debt.
But even with the increase in debt, WHC has generated AU$851 million in operating cash flow in the same period. Resulting in an operating cash total/debt ratio of 169%. This suggests to investors that WHC can cover their debt through operating cash flow.
To tell whether WHC can meet its debt obligations, we must first look at its net interest coverage ratio. A company producing EBIT (earnings before interest and tax) at a minimum three-times, its net interest payments is deemed financially healthy.
In WHC’s instance, the interest ratio of around 59.74-times comfortably meets interest obligations. Because of this, investors are generally more likely to lend money, being reliable per returns.
But operational success cannot happen without a strong management team to lay the foundation. It appears that WHC has achieved this through its highly experienced and specialised executive team.
How to succeed as a dividend investor
When there’s more risk in market, people look for stability. And although resource companies are cyclical and function on a supply and demand basis, they can also be risky.
That’s why it is important to remember in dividend investing, investors should look out for companies with good management teams and a strong track record in offering their customers real value through quality products or services.
When you buy into these companies, be prepared to stay with them in the long run and let them maximise your investment through consistent dividend payouts.
If Whitehaven suits your liking, then it’s greatly encouraged you carry on your own research.
But if you’d like further and more in depth overviews on different companies that pay investing worthy dividends, then take a look at Matt Hibbard’s top five dividend picks for 2019.
For Money Morning