Popular Archives - Live Off Dividends

In Investing

How To Evaluate Dividend Stocks

November 27, 2020

The appeal to invest in dividend paying stocks can be quite high. Receiving regular dividend payments can be enticing, especially to a new investor. I like to think that most new investors don’t know exactly where to begin but, they do want to make sure they are making good, informed purchases. With all the different dividend paying stocks out there it can be challenging to decide which of these will be the best fit for your portfolio.

It is common for new dividend investors to be lured into purchasing a company based on a high yield. However, an extremely high yield often signals signs of unsustainability. Dividend sustainability is arguably the most important factor when deciding on which stocks to buy, especially for those looking for long term investments. If the company tanks and you lose all your money, it doesn’t matter how great the dividend was. Analyzing a company’s financials is crucial when determining which stocks to buy. Four major things to look at are; free cash flow to equity (FCFE), the dividend payout ratio, the dividend coverage ratio and the net debt to earnings before interest, taxes, depreciation and amortization (EBITDA ratio).

Free Cash Flow To Equity (FCFE)

Free cash flow to equity is measured by subtracting all expenses, reinvestments, debt repayments from net income and adding net debt. This calculation determines how much cash can be paid out to shareholders. Dividends and FCFE are not the same thing though. FCFE is simply what is available to be paid to shareholders, a dividend is the amount that is actually paid to shareholders. Investors usually want to see that the company’s entire dividend payments can be covered by the free cash flow to equity.

Dividend Payout Ratio

The dividend payout ratio indicates what portion of a company’s annual earnings per share is being paid in the form of dividends per share. The dividend payout ratio can be calculated by taking annual dividends per share (DPS) dividend by earnings per share (EPS). You can also calculate the dividend payout ratio by taking the total dividends paid divided by net income. The “magic” number here is 50%. A company that pays out more than 50% of its earnings in the form of dividends is generally considered less stable and at a greater risk to cut dividends, or increase dividends at a lower rate. A company that pays out less than 50% of its earnings in the form of dividends is generally considered stable and has more potential to raise dividends and maintain dividends over the long term.

Dividend Coverage Ratio

The dividend coverage ratio is used to determine the number of times that a company could pay dividends to its shareholders using its net income. It is used to evaluate the risk of not receiving dividends. To calculate the dividend coverage ratio take a companies annual earnings per share divided by its annual dividends per share. A higher dividend coverage ratio is preferred (higher than one), this means the company can pay dividends to its shareholders more times based on its net income. If a dividend coverage ratio is lower than one it may mean that the company is borrowing money to pay dividends.

Net Debt To EBITDA Ratio

The net debt to EBITDA ratio is used to determine a company’s leverage and its ability to pay its debt. To calculate a company’s net debt to EBITDA ratio take the company’s total liabilities minus cash divided by its EBITDA. A company with a lower net debt to EBITDA ratio is generally seen as more attractive when compared against other similar companies. Beware of dividend paying companies that have high net debt to EBITDA ratios and have been consistently increasing, this may be a sign of an upcoming dividend cut.

By utilizing and understanding these measures can help make informed decisions while picking which dividend stocks to buy next. Buying stock in companies that you understand is critical and will ultimately lead to greater success for your investments.

What strategy do you use to pick your dividend stocks?

In Financial Independence

Multiple Streams of Income: Crucial For Success?

November 24, 2020

They say that the average millionaire has seven streams of income. I’m not sure who “they” are but it’s an interesting concept nonetheless. I’m also not sure if this magical seven number is anywhere near accurate but having multiple streams of income is certainly advantageous. To understand how to acquire multiple income streams we need to identify the different types of income.

Earned Income

There are two ways to get earned income. Either by working for someone or working for yourself. In either case, income that you actually work for. The downside to earned income is that it is limited by time. You can have multiple earned income streams but you are limited by a 24 hour day. Earned income jobs are typically paid by the hour further limiting your earning potential. To earn a decent earned income wage you’re likely going to need to work full-time, committing at least 8 hours per day to a single stream of income. This is generally someone’s primary, if not their only stream of income.

Passive Income

Unlike earned income, there are hundreds if not thousands of ways to earn passive income. Passive income is earned with little or minimal work involved. Some popular examples of passive income streams are rental property income, interest from a bank account, and of course, dividends from an investment account. The biggest advantage to passive is that you can be earning income from 10 different streams all at the same time, even while working for your earned income. Passive income is a great way to supplement your earned income simply because it’s so hands off.

Balance Is Key

Most of us aren’t yet fortunate enough to live solely off our passive income. Until we can build our passive income streams up enough to support our lifestyle we need to find a balance between earned income and passive income. Building these passive income streams are usually done by using the income from our earned income streams. This is limiting in the same way that earned income limits our earning potential. Fortunately, as we consistently fuel these passive income streams our income as a whole grows. This allows us more opportunity to grow our passive income streams. Early on, cutting expenses, working overtime or even a side job can help get our passive income streams up and running.

Room For Growth

There’s a good reason why most millionaires have multiple streams of income. Unfortunately, becoming a millionaire with only a typical earned income will likely never happen. The beauty of passive income is that it generally has a much larger margin for growth. Things such as stock appreciation, dividend growth and appreciation on property can all dramatically increase your net worth. Making it possible for someone with an average earned income to become a millionaire too. Whether or not seven is the end all be all number of income streams for becoming a millionaire, creating multiple streams of income is extremely important for financial success.

What is your favorite type of passive income?

In Personal Finance

5 Quick Tips To Save More In Your 20s

November 23, 2020

Making small, avoidable mistakes with your money in your 20s can have a significant impact on your overall financial health as you get older. Creating good financial habits while you’re young will give you the ability to get ahead. Saving money in your 20s can give you the freedom to buy a house, switch jobs and even retire early. These 5 tips will get you started in the right direction.

1.) Start Investing

Compound interest is one of the most impactful financial assets available. Interest is the amount earned on the initial principle, compound interest then occurs when you earn interest on your interest and your initial principle. An extra few years of compound interest can amount to a massive amount of money.

2.) Contribute Enough Into Your 401(k) To Get The Maximum Match From Your Employer

The way 401k match typically works is the employer will match a percentage of employee contributions, up to a certain percentage of the employees total salary. For example, an employer might match 100% of an employees contributions up to 3% of their total salary. If the employee earns $50,000 annually the employer will match up to $1,500. This is essentially $1,500 for free. In order to get the maximum match from the employer the employee would need to contribute $1,500 to their 401k. Anything contributed past $1,500 would be unmatched. Contributions into a 401k are tax deferred so there are benefits past just the match from the employer.

3.) Send Some Of Your Paycheck Directly To Your Bank Account

Having an emergency fund saved is one of the most important parts of your financial health. Should a large financial expense arise or if you need to be without income an emergency fund will keep you afloat for a few months. An emergency fund is generally 3-6 months worth of expenses saved in cash or other highly liquid assets. Send enough of your paycheck directly to your bank account to replace all your expenses and maintain your emergency fund.

4.) Think Rationally Before Making Large Purchases

While saving money early on in life is imperative to financial success, spending large amounts of money can be detrimental. Before making large purchases it is important to weigh all of the options. If there’s a need for a vehicle, does it absolutely need to be a brand new vehicle or will a lightly used vehicle work? Is carpooling, walking or cycling an option? How soon is a vehicle needed? Rushed decisions tend to cost more money. If the large purchase is a want rather than a need think about what kind of value it will bring. How many hours of work will be required to afford the purchase? Is there any other option that will provide similar value? Considering many factors regarding large purchases can help to avoid regretful mistakes.

5.) Set Large Obtainable Goals

Set challenging but not unobtainable goals for yourself. Setting goals that you know are too easy won’t motivate you and instead will make you lose interest. Set goals that you’ll constantly have to work towards to make happen. Set both short term and long term goals to keep you focused on smaller immediate goals as well as larger, longer term goals.

The decisions that you make in your 20s will impact your financial health more than any other decade of your life. Now is the time to build a solid foundation to build lasting wealth on. With some discipline and forward thinking anyone can give their finances a great head start.